PHILADELPHIA REFLECTIONS
Musings of a Philadelphia Physician who has served the community for six decades

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Philadephia: America's Capital, 1774-1800
The Continental Congress met in Philadelphia from 1774 to 1788. Next, the new republic had its capital here from 1790 to 1800. Thoroughly Quaker Philadelphia was in the center of the founding twenty-five years when, and where, the enduring political institutions of America emerged.

Reflections on Three Constitutions
The American Constitution has lasted two centuries, longer than any others. It is a written contract, describing in detail what the people expect their government to do. The greatest difficulty in all such Unions is to persuade multiple republics, of differing sizes and characteristics, to agree to a uniform set of basic principles. The solution, proposed by John Dickinson, was a major refinement of the principle of majority rule, allowing small member states to co-exist with big ones without being overwhelmed.

Four Constitutions
Multi-national unions of republics are uncommon, usually brief and seldom voluntary. America has had three of them, but we only got it right the second time. Uncertain why we succeeded when many others failed, we remain skeptical of changing the rules. The Europeans, on the other hand, are uncertain whether they want to follow the Confederate States of America toward extinction, or the United States of America toward world domination. When deeply considered, it is a hard choice.

Worldwide Common Currency and Corporate Headquarters

A recent book by ==== , somewhat misleadingly titled The Death of Money prompts this response. The idea of a common world currency is apparently not original with =====, but reflects private conversations by various thoughtful people. These people are attracted by the potential of reducing cost and complications, along the American model of a single currency for fifty states. Difficult achievement is illustrated by the solitary uniqueness of the negotiation example and the problems of the traditional conquest model.

The present essay proposes examination of the option for corporations to locate their headquarters anywhere within such a common currency zone, adopting local corporate rules and taxations. The argument is that advantages of unified currency reverse some advantages of local fiscal self-interest. The potential is raised whether a constant threat of corporate tax migration might actually neutralize discord.

.American and European Unions, Compared

The (1648) Treaty of Westphalia created the modern nation-state by respecting sovereignty within agreed boundaries. Soon, everyone had a sovereign King. Today, Europeans live in republics, but wish to unite for economic benefits. Like others however, they found that hard to do, and so began with monetary union, alone. Unlucky timing: world monetary crisis suddenly struck.

European colonists carried their ideas of government to the corners of the world. So when Europe adopted the system of nation states at the Peace of Westphalia in 1648, much of the rest of the world soon adopted it, too. Before then, Kings were mostly just warrior chieftains, and territorial borders were fluid. The new concepts were largely those of Cardinal Mazarin, Finance Minister of King Louis XIV of France, the Sun King. Henceforth, a national plot of land would have fixed boundaries, within which the local King established the rules. His religion defined the religion of the whole country, and could change if the King changed. He owned all of the property in the nation and could shift its ownership arbitrarily, particularly when he needed military support. Private property could be sold or transferred between individuals, but it remained sovereign territory; the distinction was between private transfer of ownership, and "alienation", which could only be negotiated between kings. The subsequent lack of individual religious freedom and the uncertainty of property transfer became two chief irritants, prompting revolts and emigration. A particular problem for the Cardinal was that Pope Innocent X felt betrayed and disliked these ideas intensely. The Peace of Westphalia did bring an end to the Eighty Year War between Spain and the Dutch, as well as the Thirty Year war involving the ruling houses of Habsburg, France, Sweden and others. Europe's era of religious warfare was now over, and secular rule was spreading. But few would disagree with ending an eighty-year war, no matter what the issues were. Although occasional wars continued to break out, the Treaty of Westphalia ushered in an era of relative peace.

{Peace of Westphalia Map}
Peace of Westphalia Map

Curiously, the motivation underlying the new rules of governance seems to have been the construction of an extensive canal system connecting the main rivers of Central Europe. The size and location of such canals had an immediate effect on commerce, and the rather heavy investment in such infrastructure demanded additional peace and stability to survive. Once the trade patterns adjusted to the new waterways, it became urgent to maintain them where they were. Once language patterns and religions became established within certain boundaries, it became materially harder to change them. This function of language was considered an advantage for four hundred years, but is now a major obstacle to achieving continental unity.

After many modifications caused by three centuries of wars, depressions and politics, this is the basic pattern which the Europeans have now decided to change, following the American example of a continent-wide republic. They have twenty-five nations to unify instead of the American thirteen, speaking far more than our one language, scarred by many more than just one revolution, many more industrial conflicts, more religious diversity, and at the moment, a financial crisis. The constitutional goals are not radically different from the U. S. Constitution, but since so much of the American approach was based on subtleties it is not possible to be confident whether the Europeans have omitted something vital or not. It is understandable for them to unify in small steps, starting with a unified currency. But they were unlucky in their timing. Unifying a common currency during a world financial panic is proving to be the hardest step, not the easiest.

Unwritten Lessons For the European Union

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Peace Treaty of Westphalia 1648

Europeans, long accustomed to providing Americans with cultural models, sometimes have a little trouble acknowledging the emerging European Union is based on the American design of 1787 Philadelphia. So perhaps it is tactless to emphasize they will encounter some of the same problems. The success of our design is a good reason to imitate it, and may in fact be the chief reason to boast of it. Since we are uncertain why many provisions work so well, we are reluctant to change them; but Europeans cannot be expected to adopt them for any vague reason like that. The main point is to maintain the right degree of vigilance and flexibility, a difficult measurement to make or to transfer to different circumstances. Our Constitution is more right than wrong, so it was intentionally made hard to change. Although technically the Constitution has been amended twenty-seven times, omitting the Bill of Rights and minor technical changes leaves us with only five substantial amendments in two centuries, mostly enlargements of the voting franchise. On top of that small base, we have built a legal structure of 100,000 pages of Federal statutes, almost a million pages of regulations, and at least double that number of state laws. Our legal system has many flaws, but the small ones are easy to change. The great danger for the Europeans lies in taking a similarly huge body of multi-nation statutes, then attempt to cram them into a constitution which by definition is hard to change. James Madison was not in a position to see this point. Looking for it in The Federalist Papers is futile, because they were written to persuade New York to ratify the Constitution, and contain a moderate amount of slant. Add to all that a recognition that the U.S. Supreme Court makes a hundred little amendments every year. It follows that it would be bold indeed to list a handful of examples of what the Europeans should avoid at all costs, or to omit at their peril.

{top quote}
The success of our design is a good reason to imitate it, and may in fact be the chief reason to boast of it. {bottom quote}

The people in power in the individual nations of Europe, and the political factions which elected them, don't really want to give up power to a central government in Strasbourg and Brussels. They wouldn't be human if they did. Exactly the same reluctance inspired our thirteen colonies in the Eighteenth Century, and we circumvented it by excluding state officials from the ratifying conventions. Having multiple sovereignties breeds jealousies however, particularly when the issue is governance. Our ratifying process was particularly rancorous, and echoes of it still reverberate. If transitions are too rapid, even from a bad system to a good one, all changes can prove disruptive. For ousted incumbents, all transitions are too rapid. The Europeans additionally have a big problem we didn't have, of multiple languages, so harmony will be slower to arrive -- try to imagine a common market in the Tower of Babel. By lacking multiple languages to rally around, we stumbled into a two-party system, which is actually a big improvement over more-or-less proportional representation by multiple parties. Without having any foresight on the issue, we established a system in which "deals" are made internally and voluntarily, between the extremists within each of the two major parties before the November elections, because by then the central issue has become whether the party might not win with a particular candidate standing on a particular platform. The policy positions of the nominees of both major parties draw closer together, and we don't get a revolution when one of them does win, even by a single hanging chad. Unfortunately the candidates are usually so close to the haphazard process of pre-election virtual compromise that they often consider it less binding than the public does. But by major contrast, in an overtly multi-party system a coalition is formed after the election is over, so the "deals" between splinter parties must also be made after the election is over; voters are completely cut out of the most important decision-making. Splinter parties are an easy recourse for nations with many minorities, and are to be avoided at all costs. If a unified nation really cannot be constructed without such recourse, perhaps they would be better off with a King. Since political parties are not mentioned in the American Constitution, this advantage of a two-party system has never been widely debated.

Our experience teaches one more important principle, unwritten in the Constitution. The outstanding message of the American experience from 1787 to 1850, especially the twenty year period after Washington's presidency and quite unforeseen by the Founding Fathers, is that no party in power can see any merit to the rights of the minority until it has itself spent some time out of power. Nor can any party of complainers and reformers see any merit in prudent caution until it has itself spend some time wielding power. Let's suggest a rule to the Europeans: every political faction is untrustworthy until it has spent two terms in office, and then two terms out of office. It would appear that it takes even longer for political parties to mature than it does for governments. We achieved this hat trick by starting out with an Electoral College that didn't work very well, most particularly in the tied election of 1800. Once the Electoral College served its purpose of effecting compromise at the Constitutional Convention, we have largely ignored it as a result of the 1800 fiasco. Perhaps another approach is to do it in stages, considering the Articles of Confederation as a preliminary step to enacting a Constitution, as it were. However, most European nations can point to several constitutions in their past, without significant progress toward continental unity.

Maybe even that assessment is too generous to our own history; after all, in 1860 we had our Civil War. You'd certainly hate to think it was essential to have one of those, until you reflect that Europe really has had four or five major wars during the past two hundred years. Could it actually be true that peaceful union really does lead to further peace? George Washington denounced standing armies, while Dwight Eisenhower warned of the military-industrial complex. Perhaps both of them were really warning that war-like behavior leads to war, by eliminating some preliminary steps.


REFERENCES


The Records of the Federal Convention of 1787 Farrand's Records
Chart of the Thirteen Original Colonies American History
U.S. Constitution Legal Encyclopedia

http://www.philadelphia-reflections.com/blog/998.htm


U.S. and E.U. Exchange Experiences (1)

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Nobelist Lawrence Klein

THE Global Interdependence Center (GIC), founded by Nobelist Lawrence Klein in 1976, brings noted foreign financiers to address Philadelphians interested in finance, and takes those Philadelphians abroad to return the visits. It's a gracious, entertaining, and highly stimulating travel club of very nice folks. Its 25th Annual Monetary and Trade Conference (in 2001) was especially exhilarating. Christian Noyer, President of the Banque de France, gave a description of the rationale and direction of the European common currency. Since he was the Euro's driving force right from the beginning, the experience of hearing him was pretty much like hearing Alexander Hamilton tell the story of the founding of the American banking system. Such a notable event needs to be reported.

{Christian Noyer}
Christian Noyer

Christian Noyer urged that the central concept of the European Union is deliberate, voluntary surrender of national sovereignty -- for a mutually beneficial purpose. The declared purpose of limited surrender of national control of the currency is economic; price stability, lower interest rates, the stimulation of international trade by lowering transaction costs. But the unstated, grander, purpose is the elimination of war. Because the limited technical purpose has been achieved in almost all areas, the grander purpose of eliminating war has not been an accident. With this simple, even humble, declaration it immediately becomes possible for a mildly irritated American audience to understand that European reluctance to become our active military ally grows out of a highly commendable set of motives, and widely differing historical experiences.

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inflation

As things worked out, the new nations who have recently joined the Union ("The U") are anxious to modernize, because the people of those nations demand modernization and their leaders must agree to achieve it. Inflation, that hitherto inevitable fund-raiser for national goverments, must be eliminated in order to join, and stays eliminated because the other members of The U will not tolerate it in a partner. In his curious way, "price stability" has placed the Union on the side of the people against the locally powerful, although it would be untactful to emphasize it. From the elimination of inflation comes lower interest rates, and from that, a stable currency. From that comes economic growth, for which the political lingo seems to be "modernity". As a consequence of this undeniable success, all nations in the area want to join the Union, and none wants to leave it. If that prevailing attitude doesn't lead to the elimination of what might then be a civil war, it's hard to know what will eliminate it. The marvel of all this skillful analysis is how natural, soft and modest it sounded, feeling like an old soft shoe. Eventual political unification is clearly an old dream in Noyer's head, but for now he seems content with the vindication that it is possible to have a currency without having a country control it. It seems to be a steamroller of economic logic, flattening out the pretenses of merely political power.

No less an economist than Martin Feldstein has written that stable unified currency is doomed in the European context of widely diverse labor markets; Noyer seems pleasantly serene in the face of this argument. He wouldn't say so, of course, but some in the audience got the idea that Noyer probably believes the power of this cooperative idea will eventually discipline the unions the way it disciplined the politicians. One certainly hopes so, for the sake of this smooth, likeable French aristocrat.

http://www.philadelphia-reflections.com/blog/1229.htm


Aftermath: Who Won, the States or the Federal?

{Thirteen Sovereign States}
Thirteen Sovereign States

In the case of the American Constitution, the initial problem was to induce thirteen sovereign states to surrender their hard-won independence to a voluntary union, without discord. Once the summary document was ratified by the states, designing a host of transition steps became the foremost next problem. A dominant need at that moment was to prevent a victory massacre. The new Union must not humble once-sovereign states into becoming mere minorities, as Montesquieu had predicted was the fate of Republics which grew too large. Nor must the states regret and then revoke their union as Madison feared, after he had been forced to agree to so many compromises. As history unfolded, America soon endured several decades of romantic near-anarchy, followed by a Civil War, two World Wars, many economic and monetary upheavals, and eventually the unknown perils of globalization. When we finally looked around, we found our Constitution had survived two centuries, while everyone else's Republic lasted less than a decade. Some of its many flaws were anticipated by wise debate, others were only corrected when they started to cause trouble. Many tolerable flaws were never corrected.

{top quote}
Great innovations command attention to their theory, but final judgments rest on the outcome. {bottom quote}
.

Benjamin Franklin advised we leave some of the details to later generations, but one would think there are limits to vagueness. The Constitution says very little about the Presidency and the Judicial Branch, nothing at all about the Federal Reserve, or the bureaucracy which has since grown to astounding size in all three branches. Of course the Constitution also says nothing about health care or computers or the environment; perhaps it shouldn't. Gouverneur Morris, who actually edited the language of the Constitution, denounced it utterly during the War of 1812, and probably was already feeling uncomfortable when he refused to participate in The Federalist Papers . Madison's two best friends, John Randolph and George Mason, attended the Convention but refused to sign its conclusions, as Patrick Henry and Thomas Jefferson almost certainly would also have done. On the other hand, Alexander Hamilton and Robert Morris came to the Convention preferring a King to a President, but in time became enthusiasts for a republic. Just where John Dickinson stood, is very hard to say. Those who wrote the Constitution often showed less veneration for its theory, than subsequent generations have expressed for its results. Understanding very little of why the Constitution works, modern Americans are content that it does so, and are fiercely reluctant about changes. The European Union is now similarly inflexible about the Peace of Westphalia (1648), suggesting that innovative Constitutions may merely amount to courageous anticipations of radically changing circumstances.

{President Franklin Roosevelt}
President Franklin Roosevelt

One cornerstone of the Constitution illustrates a main point. After agreeing on the separation of powers, the Convention further agreed that each separated branch must be able to defend itself. In the case of the states, their power must be carefully reduced, then someone must recognize when to stop. If the states did it themselves, it would be ideal. Therefore, after removing a few powers for exclusive use by the national government, the distinctive features of neighboring states were left to competition between them. More distant states, acting in Congress but motivated to avoid decisions which might end up cramping their own style, could set the limits. The delicate balance of separated powers was severely upset in 1937 by President Franklin Roosevelt, whose Court-packing proposal was a power play to transfer control of commerce from the states to the Executive Branch. In spite of his winning a landslide electoral victory a few months earlier, Roosevelt was humiliated and severely rebuked by overwhelming refusal of Congress to support him in this judicial matter. The proposal to permit him to add more U.S. Supreme Court justices, one by one until he achieved a majority, was never heard again.

P
{taxes disproportionately}
Taxes Disproportionately

Although some of the same issues were raised by the Obama Presidency seventy years later, other more serious issues about the regulation of interstate commerce have been slowly growing for over a century. Enforcement of rough uniformity between the states rests on the ability of citizens to move their state of residence. If a state raises its taxes disproportionately, or changes its regulation to the dissatisfaction of its residents, the affected residents head toward a more benign state. However, this threat was established in a day when it required a citizen to feel so aggrieved, he might angrily sell his farm and move his family in wagons to a distant region. People who felt as strongly as that, were usually motivated by feelings of religious persecution, since otherwise waiting a year or two for a new election might provide a more practical remedy. However, spanning the nation by railroads in the 19th Century was followed by trucks and autos in the 20th, and then the jet airplane. While moving residence to a different state is still not a trivial decision, it is now far more easily accomplished than in the day of James Madison. A large proportion of the American population can change states in less than an hour if they must, in spite of a myriad of entanglements like driver's licenses, school enrollments and employment contracts. The upshot of this reduction in the transportation penalty is to diminish the power of states to tax and regulate as they please. States rights are weaker, since the states have less popular mandate to resist federal control. It only remains for some state grievance to become great enough to test the present power balance; we will then be able to see how far we have come.

{high gasoline taxes of Europe}
High Gasoline Taxes of Europe

Since it was primarily the automobile which challenged states rights and states powers, it is natural to suppose some state politicians have already pondered what to do about the auto. The extraordinarily high gasoline taxes of Europe have been explained away for a century as an effort to reduce state expenditures for highways. But they might easily be motivated by a wish to retard invading armies, or to restrain import imbalances without rude diplomatic conversations. But they also might, might possibly, respond to legislative hostility to the automobile, with its unwelcome threat to hanging on to local populations, banking reserves, and political power.

It helps to remember the British colonies of North America were once a maritime coastal settlement. The thirteen original states had only recently been coastal provinces, well aware of obstructions to trade which nations impose on each other. Consequently, they could readily design effective restraints to mercantilism within the new Union. Two centuries later, repeated interstate quarrels provided fresh viewpoints on old international problems. As globalization currently becomes the central revolution in trade affairs of a changing world, America is no beginner to managing the intrigues of international commerce. Or to conciliating nation states, formerly well served by nation-state principles of the Treaty of Westphalia, but thus all the more reluctant to give some of them up.

http://www.philadelphia-reflections.com/blog/2257.htm


As Others See Us

Americans are rightly proud of their Constitution, an achievement no one seems able to match. It's rude to point it out, but some Americans are just a little condescending about Europe's protracted examination of a federal union, and the World's plain inability to design a United Nations Charter that everyone can warm to.

{Charles de Gaulle}
Charles de Gaulle

But just a minute, look at the centuries of history we have compiled. After eighty years, the American union broke apart in the bloodiest war in our history, proportional to the population at the time. After another century it was safe to suppose we were past that episode, at least mostly.

And if you were an elected representative of one of the European states, charged with assuring a fair result for your constituents, you would have to warn them of something America seems to demonstrate. The new federal government at first had to be deferential to the various states, in order to persuade them to ratify the document. It wasn't an easy sell, and a promise had to be made and reiterated that every single power being surrendered was absolutely necessary for the common welfare of all. And it was necessary to repeat the promise in the Tenth Amendment, that nothing more was being given, nothing up our sleeve. The Eleventh Amendment which followed soon afterward, could even be described as a test of sincerity. The states demanded something they really should have been ashamed to ask for, but it was given to them as a demonstration who was still boss. The Federalist party soon broke apart, and had to become craven, only persisting in the assertion of powers it was absolutely clear states needed to give up.

But soon after that, the federal government has never ceased to nibble away at the cheese. Step by step, gradually but relentlessly, power has shifted from state capitals to the District of Columbia. It is now possible to say without serious contradiction that state legislatures really don't have much to do of any importance. Is that the lesson European officials are learning from our history?

Maybe not, but Charles de Gaulle once made a wisecrack suggesting another answer. He wanted to go to Heaven, he said. He really did. But he was definitely in no hurry to get there.

http://www.philadelphia-reflections.com/blog/1670.htm


Compromise Outside the Borders of a Debate

{Cardinal Mazarin}
Cardinal Mazarin

For example, the north European states, Germans in particular, must resign themselves to subsidizing the Mediterranean nations for years to come, working a hard work ethic while they watch their wards live an easier one. But it can be accomplished; New England has been subsidizing Mississippi for more than a century, and Appalachia has been fighting the rest of the country's wars for them since 1960. Lincoln for example, was an ardent Whig, which in those days meant an advocate of helping commerce by the intervention of government. That is essentially a 17th Century French idea, said to originate with Cardinal Mazarin and Jean-Baptiste Colbert. Whether it is useful to continue the same idea for four later centuries is an emotional issue in a class with our own reluctance to change a word of the Constitution. There is even a shadow of present concern that Americans will have so forgotten the lessons of free interstate commerce that they might somehow surrender it for some other blandishment. Certainly, free international trade has its enemies. The abolition of slavery was of course an overdue achievement, too, but perhaps our long slog toward equal rights has allowed this second crusade to overshadow the history of what really was the main one. In case anyone feels impelled to start a quarrel about this viewpoint, let me remind him that Quakers started the abolition movement, right here in Philadelphia, and have nothing to apologize about, for maintaining the Union was a more important justification for Civil War than was abolition of slavery.

{Jean-Baptiste Colbert}
Jean-Baptiste Colbert

With the American Civil War repeatedly reminding us how dangerous it can be for even unified nations to disagree about vital regional issues, it is useful to review such an American inter-state friction even closer to the time of unification, namely the repayment of Revolutionary War debts. Here, the American post-unification memories were still about the same as pre-unification. Essentially, only the legal documents had changed very much. Secretary of the Treasury Alexander Hamilton was trying to arrange equitable federal assumption of all thirteen state war debts, after Virginia had already paid off its bonds and obviously had thus given up the leverage of refusing to pay them. Virginia at that time was the largest of the component states, and because George Washington was President, Virginia was politically very powerful. But submerged within the now more powerful national government and subject to its rules, Virginians were now in quite a new position. Because Hamilton was trying to establish a good international credit reputation for the new national government, and because he wanted to acquire a creditor's power over all the states, he was anxious for the federal government to assume all state debts. Naturally, Virginians believed they would not have paid off the bonds if they had known this was coming. That's different in this case from knowing the rules before they acted. Imaginative alternatives were limited because the recent war had left no money in any treasury, or even likelihood that foreigners would extend credit. Because the Europeans chose to create monetary union as a step toward political union, the problem confronted European negotiators who were still positioned on behalf of independent sovereign states. The Greek government was skirting close to default on its bonds, whereas in the other case the

http://www.philadelphia-reflections.com/images/missing_img.gif
Liquidity Trap

The solution reached was to mollify Virginia with a political plum, the location of the Nation's capital named Washington across the Potomac from George Washington's home, potentially directing the flow of Atlantic trade to the Potomac and to Virginia. Philadelphia was intensely displeased, and there are remarkably few statues and mementos to Virginia patriots to be found in that city, even today. However, the political maneuver remains as a classic; when negotiations reach an impasse on some central issue, try to balance the political debt with arrangements which have little to do with the issues at hand. In the case of the European Union, the Greeks have no money, and probably can never repay the present bailouts, let alone any extra future indebtedness. Because of the recent international recession, other sources of funds from unrelated nations may well be unavailable. Argentina has recently nationalized a huge Spanish oil developer operating on Argentine property, so there is a question whether the Spanish banking system is affected in some way that will further strain the Greek default, and thus further drying up sources of European credit. China is beginning to show signs of the Liquidity Trap, where ample funds are available in its banks but no one wishes to borrow money to build facilities, to produce goods, which the Chinese may not be able to sell. So, there are signs available to even the casual observer that it may simply not be possible to find the money to finance another Greek bailout, except to go back to the Germans. Since Adolph Hitler within recent memory had come close to conquering all of Europe militarily, there is understandable reluctance to appeal to Germany to become the rescuer of Europe, financially. The situation thus comes close to crying out for a solution that benefits some rescuer other than Germany, or which benefits Germany in some way that is not monetary. Like it or not, Germany has already rescued East Germany once, Greece at least twice, and can expect several more decades of subsidizing its less provident fellow Europeans. It is getting to be time for the rest of Europe to express its gratitude in some tangible, visible way.

http://www.philadelphia-reflections.com/blog/1230.htm


U.S. and E.U. Exchange Experiences (4)

{Political Cartoon}
Political Cartoon

Western civilization now takes One-man, One-vote for granted in any variant of national governance, and a good thing, too. The Romans modified ancient Greek democracy models into a Republic, allowing slightly modified democracy to become practical for larger governments. Citizens elect representatives, and it is possible to imagine groups of representatives electing their own representatives to higher bodies, and so on, up the line. As long as democracy remains inflexibly the model for a united Europe, other mechanisms must be adjusted for the obvious inequalities of huge population masses. Since money is the main means of exchange in national systems of compromises, it is a handicap for them to freeze a monetary system in place before governance negotiations have even begun. As a reminder of the American experience, remember that in 1787 Virginia was by far the largest and richest state, not at all the case at present. Indeed, the political landscape then consisted of nine small states ranged against four big ones. Virginia, Pennsylvania, and Massachusetts are no longer considered big states, and New York is fast receding from the top tier. Organizing monetary structures around size can prove crippling to future designs of unified government, particularly if sufficient time elapses between the two steps. At the very least, leisureliness creates an opportunity to cloak opposition to unification within delaying tactics, presenting arguments to "wait and see" how the monetary system works. At worst, it creates an incentive to make certain the monetary system will not work.

{Bitting Gold Coin}
Bitting Gold Coin

However, a bridge player must play the cards as they are dealt to him, and Europe has decided on a piecemeal approach to organize an eventual political union. The first step of monetary union is in its tenth year, and in deep trouble. Therefore, a new alternative to be considered is whether to have a monetary union without a government to oversee it. Since the Spanish doubloon was for centuries the medium of maritime exchange for the whole western world, it can be done. The doubloon was a gold coin worth its weight in gold, the so-called "piece of eight". Since that kind of money proved entirely workable, the issue of feasibility is one of backing for the currency. When gold from the New World ran low, it was hard to support a growing world economy with a shrinking currency; the price of everything went steadily downward, and local shortages were common. So silver was substituted, and then the coinage became fractional. That is to say, paper money was issued in a fixed ratio to the gold in government vaults. Finally, paper money had no metal backing at all, and was issued by central banks in response to prevailing prices of goods. Using an arbitrary figure of 2% to represent population growth, if the consumer price index plus 2% goes down, the Federal Reserve (or equivalent national central bank) prints more money. Conversely, if it goes up, the Federal Reserve bank stops issuing paper money. The currency is thus "inflation indexed" and its worth guaranteed by the government against an international financial panic. World opinion has a lot to do with the value of a national currency, although in theory the financial reserves are the sum total of all businesses and property available to the government to confiscate. By encumbering its national property, the government monetizes its assets. Even if it were possible to arrive at a tolerably accurate estimate of the total net worth of a nation, much of it is illiquid and has a considerable cost to monetize it. In practice, however, everyone realizes that the government will never sell an island or peninsula, probably going to war to prevent it happening, or simply going bankrupt or defaulting on its debts. The reserves which are listed as backing its money supply are largely frozen in the face of an actual financial panic. Everyone could name a dozen nations which would probably default, should creditors ever trust them, and there are many more who would seriously consider it. However, there are enough "speculators" who take a chance on this scenario for a fee, to keep the system running. If things start looking ugly, these intermediaries quickly disappear and the "markets are frozen". To protect their economies from this sort of chaos, governments look to merging their currencies, or to promising to rescue other member nations in trouble. A big pool of reserves is inherently safer than a small one, so currency unions are attractive to almost everyone.

{GooseStepping}
GooseStepping

Currency unions however look like sausage factories when you get inside and look at the details. Some parts of New England are essentially piles of pebbles with a thin layer of topsoil, while the topsoil in Illinois is mostly four feet deep. Some rivers are full of fish, others are full of pollution, and so forth. As long as we are one united country, local differences are largely ignored; if you can't farm the pebbles in Connecticut, you can move to Greenwich and sell Credit Default Swaps. If that doesn't work, you can move to Illinois, and if you don't like big city political machines, you move to Utah. There's a frictional cost to all of this, but it remains a practical alternative. For Europe, it's not so easy to learn a new language, the schools are not so good in Kosovo, and the price of a taxicab in Paris is astonishing. If you are a gypsy, you are very likely to encounter pitchforks after your first night in the campground. No doubt most of this difference between the continents would disappear after fifty years of political unification, but there would be enough problems to make the survival of the E. U. somewhat questionable for two generations, at least. During all of that time, interest rates would reflect the existence of a real risk, and occasionally crises will appear. Madison, Jefferson and Hamilton were bosom chums in the 18th Century; within five years of the new nation they were at each others throats. Founding Father Robert Morris, one of the richest men in America, was denounced and his motives questioned on the floor of the Legislature by a Western Pennsylvania nobody, within weeks of the Constitutional Convention. Vice President Aaron Burr put a bullet through Secretary of the Treasury Alexander Hamilton. Social upheavals are just that: upheavals. The problems associated with piecemeal approaches to the monetary union and the political union have been mentioned. The other side of it may be that many of the unique monetary problems of Europe have been brought to the surface by the current financial panic, and political solutions to monetary difficulties can be devised in advance if anyone has time to do it.

The political side of Europe is becoming plain. The Germanic tribes to the North are rich and have a history of trying to conquer all of Europe; the Latin tribes of the South are poor, and nurse a fairly recent memory of defeated military occupation. The Germans are nevertheless the only possible rescuers of the present financial panic. It will not be easy for the Latin component of Europe to humble themselves before a German financial rescue, but they must do so for decades into the future. Although both groups suffer from the debility of a Welfare mentality, the South has it worse and their financial reserves are very questionable. Unless they are ready to do unlikely things like sell real estate sovereignty, they are going to find the ownership of their companies in German hands, and very likely have to endure the sight of the children of Wehrmacht officers managing their local economy. They will have to be tolerant. The Germans are not happy to work long hours so the Greeks may work shorter ones, and must be forgiven for indignation that German funds donated to rescue the Greek Welfare state are diverted for the personal use of corrupt Greek officials. Nevertheless, such affronts eventually become tolerable; a dozen American cities are at least as corrupt, and the California beaches appear to be utterly devoid of the famous American work ethic. Nevertheless, the most likely stark alternative would seem to leave only America, India and China in charge of major viable economies.

http://www.philadelphia-reflections.com/blog/2290.htm


Rise of the Formidable State

{Martin Luther 1517}
Martin Luther 1517

The Catholic Church dominated Central Europe for centuries after the fall of the Roman Empire, but after the final elimination of European paganism and the invention of the printing press, church dominance weakened. Martin Luther in 1517 started the (Protestant) Church Reformation which in 1648 was to culminate in reversals of roles: Kings and their secular states not only put an end to eighty years of religious wars but also established their dominance over Church power at the Treaty of Westphalia. Although the rules were not spelled out in the treaty, the "nation state" was created as the new organizing principle of governance. Land boundaries were established first, then residents within that territory were unified with a sovereign in a highly variable two-step process. The King chose his religion and everyone else complied, except for those who chose to flee. That was indeed a bitter pill for Pope Innocent X. The Catholic Church had once been "sovereign", now the King was sovereign, the highest level of appeal. Tiny national boundaries had previously made it easier for the Vatican to rule a multi-nation arrangement; after Westphalia many nations consolidated into fewer. When avoiding the use of force was important, however, nations generally straightened out their differences by splitting up and becoming smaller. The American colonies were to come close to losing their war for independence by being too weak, however, and all of them wanted to explore uniting into a stronger Union. There had been essentially no examples to follow, for thirteen sovereign nations to unite voluntarily, but to many it seemed like a logical progression. It seemed to require a new sort of sovereignty, perhaps it would be a republic, but many were unsure of that. At that point, almost every nation on the globe had a king of some sort, But although there were many who felt the hereditary monarchy had proven its value, it was simply too much in 1787 for most Americans to fight eight years to be liberated from a hated King, then put themselves back into a monarchy. Besides, many advantages of a larger union had appeared during the Revolution. At least they deserved to be explored and tested. The Treaty of Westphalia and the Constitutional Convention had a number of rough similarities. Both regions had experienced long periods of tyrannical central rule, followed by shambling disintegration, and disliked both extremes. Both of them stumbled into new forms of governance, searching for a more moderate balance. Both of them improved their situation: achieving fewer wars and more prosperity.

{Thomas Hobbes}
Thomas Hobbes

The Peace of Westphalia tested out a number of types of governance, which at that time mostly consisted of choosing ways to pick a King and defining what was expected of him. Reading Machiavelli still shocks the civilized world by his stating outright that the people of a nation mainly want to be prosperous and successful in war. He thus announced it is often useful to have a ruthless even unscrupulous king, bound by no moral rules from any other source. Thomas Hobbes in The Leviathan argued that the people should transfer their rights to the King, fusing their goals to his. Jean-Jacob Rousseau argued the opposite: that all sovereignty resides in the individual citizen, his sovereign opinion emerging collectively with other citizens as the "will of the people", or "vox populi est vox dei". Unfortunately for all of these and other theories, in 1787 almost two centuries had by then elapsed since the Treaty of Westphalia, and many unfortunate consequences had arisen from these proposed forms of government. Rousseau's fatal flaw would only appear a year or two after the Philadelphia Convention, at the guillotine. The flaw of pure democracy was that democracies prove workable only in small countries with good acoustics. Consequently, the first decision of the Constitutional Convention was already clear; America had to have a republic, with elected representatives. At that time, Americans were better acquainted with the Roman Senate than the Greek model, and George Washington was particularly enthralled with the Roman republic. Of course, almost everyone was still better acquainted with the British Parliament, for which the Roman Senate was mostly a polite conversational substitute, under the circumstances.

{Niccolò Machiavelli}
Niccolò Machiavelli

James Madison, who was one of the few at the Constitutional Convention with a classical college education, was deeply concerned about the Formidable State. Not only had the Revolution been fought over the abuses of George III, but two centuries of the Holy Roman Empire were convincing that Machiavelli on the throne was often inspired by motives at odds with those of his subjects. Surrounded by Quakers in Philadelphia, the Constitutional Delegates were ready to listen to arguments blaming most wars on Kings rather than mistaken reasoning. What emerges from reflecting on the Constitution is a system which seems to believe we should have a government in which the people, ruling within a body of law, are sovereign, the last word. The voice of the people without rules leads to anarchy. Religion is respected, but avoid church politics at all costs. Instead of a sovereign moral code, we merely need a set of axioms, like Euclid's geometry. Half a dozen principles seem to work well enough, the rights of the minority, freedom of speech and religion, English common law, the right to bear arms, are axioms probably true but certainly not sacred. The rest is "common sense" or vox populi. In some final convulsion of new discovery, we might change an axiom or two, but slowly, slowly. Maybe a straight line isn't the shortest distance between two points, but it would be so disruptive to say anything else, we should demand proof of the highest order even to discuss it.

John Dickinson of little Delaware was probably the best lawyer in America at the time, had written many documents, great and small. But he delivered his most telling speech in private, to James Madison in the corridor, so to speak. In effect he said it was intolerable for the big states to relegate the small states to perpetual minority status; how would Madison like to live in a state where no one would ever have a chance of election to President? The convention had been meeting for five weeks, and Madison had won almost every vote. From that point forward however, he mostly lost every vote without apology. Eventually, he got the point; but not before he was in despair that the Constitution was going to be a failure. And not before the small states each got two Senators.

This series of essays has a focus on the past, particularly the past of my home city, Philadelphia. At this particular moment, there is as much concern about the unchecked power of central government to endanger human rights with genocide and torture as there was in the days of William Penn and Patrick Henry. There is as much concern about confiscatory debt forgiveness as was expressed by Robert Morris and Alexander Hamilton. But on the other hand, there is no more concern, either. Whatever the offenses of the Vietnam War or the Holocaust, we need to be hesitant to endorse supra-national sources of morality like the United Nations or the Universal Declaration of Human Rights, when we already have considerable experience with employing our own axioms of behavior.

http://www.philadelphia-reflections.com/blog/2258.htm


Adjusting Government Finances with Immigration

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Emigrants

Wars, religious conflicts and natural disasters provoke mass emigrations. When emigrants choose a place to go to, they primarily focus on economic betterment. It's true they like to settle among people of the same language and culture, but it must be pointed out that during the first half of the Twentieth century the quotas for Great Britain were frequently unfilled. This sort of observation leads to the conclusion that American immigrants have mostly been poor, and come from poor countries. The first generation clings together in cultural havens, their descendants are motivated to learn to assimilate, to become as rich as the earlier settlers seem to be. The prisons tend to fill with recent immigrants, but the victims of their crimes tend to be other members of their immigrant communities. The pattern has been repeatedly observed in successive waves of different ethnicities. There is always a wave of initial friction; every group seems to get over it, eventually.

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Frederick Jackson Turner

In America during the Nineteenth century, there was a frontier to welcome newcomers. Usually the first immigrants are single males, so the advancing frontier was a scene of disorder and special attitudes; after women came along to the frontier, things got quieter, but the unattached rowdy males moved onward. According to Frederick Jackson Turner who started the idea, the frontier finally closed at the beginning of the Twentieth century, provoking the cultural upheaval we now call the Progressive Era. In modern Europe, the frontier had long been gone before European integration began its present upsurge, except for the extensive devastation areas caused by World War II. To whatever extent the Frontier Concept eased American resettlement, under-inhabitation is not now an important factor in Europe. Nor is agriculture nearly so important as it once was. The family farm was a nice isolated little unit, able to preserve the cherished traditions, but now an immigrant mostly starts out as a busboy waiter, surrounded by urban bustle. And urban temptations. Assimilation is greatly eased by television; an observant immigrant can learn things we wish he wouldn't, but many immigrants have learned English, bent over an ironing board in the family kitchen. The assimilation of immigrants is certainly quicker than it was, but it is not necessarily much easier.

{Welfare State}
Welfare State

But by far the greatest social difference between 18th Century immigrant America and Twenty-first Century cross-immigrant Europe, is the set of attitudes and expectations variously called Socialism, or the Welfare State. All of the uproars and crossness associated with the Welfare state are threatening to get much worse, on both continents, because the inciting factors are getting worse. They would be: the astonishing improvement in longevity, and the massive avoidance of the topic until it has almost, we hope not definitely, reached a point where it can destroy the economic system. As a reminder, life expectancy at birth in 1900 was age 47, and now is at least thirty years longer. This incredible benefit to mankind crept up on us through two world wars and many smaller ones, plus several sickening genocides on several continents, but every year it kept getting better, or worse depending on how you view it. Newsmagazines are now confidently predicting it will go to age 100 in a few decades. The problem masquerades as a Social Security problem, or a disability problem, or a health cost problem, or a pension fund problem. But it's all the same problem: we got thirty years of extra retirement time, without making adequate provision to pay for it. Some of us provided for it privately, many made no provision at all. Governments generally pretended to make provision for it, but actually made it much worse with short-term fixes. Our elected representatives "kicked the can down the road."

{ERISA}
ERISA

What is true for individuals is also true of nations. The Germans, badly disconcerted by the hyper-inflation of the 1920s, almost developed a national psychosis about frugality, hard work, savings for the future, and the avoidance of inflation. Unfortunately, they had also developed a hatred for war. That's a good thing, but it is not the same as recognizing the need for frugality, when a whole nation convinces itself that avoiding war will provide the funds to pay for a thirty-year vacation, following a few decades of efficient work on a short work week. It will allow the German nation to enjoy a longer retirement period than, say, the Greeks. But it may not stretch to a full thirty years, even for them. Or even for us Americans. We work longer hours with less vacation time, but we retire too early, and we are too extravagant with wars, infrastructure, bailouts, improvement of the poor, and unlimited immigration of more poor people. Our pension funds were started on a collision course by the passage of ERISA, the appalling accounting standards of which are only now becoming evident after forty years. The adequacy of the accounting methods was based on the return on assets, with no connection to the pension liabilities they were supposed to pay for, with no mark-to-market readjustments, no investment benchmarks, inadequate inflation adjustments, and a definition of risk based on volatility of asset prices -- a total irrelevance in this situation. The trustees of these pensions are provided no asset portfolios to examine, no readjustment for changes in the workforce composition, and no running comparison between each year's assets and each year's adjusted liabilities. Even the term "Liability" does not cover what is owed. Only the large corporations which dumped these defined benefit plans, can feel comfortable that the company can survive a serious accounting of future pension costs.

Because we are getting well off from our announced topic, this is enough about off-the-books accounting for retirements which have grown much longer than originally contemplated. The point here is that European countries are hoping to merge twenty seven nations, each of whom has a different version of this symphony. If a nation can afford to give its citizens twenty years of retirement, it is still not willing to sacrifice for another nation which can only give its citizens five years of retirement, because its own frugal elderly are facing ten years of destitution, nevertheless. Are they expected to increase the ten years they cannot afford--to fifteen years of destitution, in order to help another nation that is even worse off? The common reading of human nature is that they will instead prefer to assess the other nation as shiftless and lazy, and shrug their shoulders.

http://www.philadelphia-reflections.com/blog/2261.htm


Law of the Sea

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UN Logo

Oceans cover two thirds of the Earth's surface. Since global warming is melting the ice caps at an accelerating rate, probably even more of the Earth will be covered by ocean a century from now. In the days when a cannon shot could travel three miles, it became generally agreed that a nation would hold sovereignty for three miles out to sea. A decade or so ago, that was extended to 200 miles by some international body, but few people remember that. Three miles from the coast, that's it. But the underlying reality, then and now, has always been that if you can't defend a piece of land, you may not keep it very long.

Although satellites probably make it possible to survey boundaries on the ocean floor with some accuracy, land/surface markings are more at the mercy of tides. Even though it's possible to survey ownership rights of some sort on the ocean floor, the personalities of sea captains are probably going to set the practical boundaries of ocean kingdoms for quite some time to come. If a land nation reaches for power that is not to the taste of the Captain, he just goes somewhere else to land. Enormously expensive oil drilling platforms are sitting ducks, sort of held for ransom. They can seek the advice of maritime lawyers, but it's likely the most meaningful appeal will long continue to be a call to the naval power which dominates the region. It's nevertheless useful to watch diplomatic minds at work, just to be aware of what they are up to. Because what they want to do is to change the rules of the game.

In essence, the Law of the Sea advocates begin with the premise that since no one owns the ocean, everybody owns it. It's not entirely clear why one assertion follows the other, but that's the basis for the claim. Since they think they own it, they think they can pass laws controlling it, can share in any profits from it, and ultimately can sell it to the highest bidder. Since all of this is highly debatable, many wars have been fought for less. The same ideas once dominated the disposition of our own western wilderness. Essentially, President Lincoln wanted to pay for the Civil War by selling land, as well as creating land grant colleges, transcontinental railroads and other assorted boodle. So he sold off, or gave away, quite a lot of it. Every time you sell land to someone, he develops a reason to defend your original right to say you owned it. But governments, including Lincoln, change the rules for their own benefit. Lincoln sold land, but it still remained part of America. If he had sold a part of America to China, it would be called alienation. You don't hear about very much of that happening. Alienation generally means war. And the suggestion that something of great value should be nationalized or internationalized generally means that somebody doesn't own it, but wants to have a piece of it, free.

The history of the Treaty of Westphalia, the United States Constitution, the European Union -- and for that matter, the French, Russian and Chinese Revolutions -- warn that it is very hard to develop a fair system of governance for uninhabited space. The present proposal under the Law of the Sea offers each cooperating nation one vote. That could be modified by adjusting the votes by population size, as the constitution did in 1787, or it could be changed to bicameral as John Dickinson insisted at the Constitutional Convention, Representatives chosen by population, Senators chosen by states, and both must agree. Unfortunately, even that can be tinkered with. In the contested tie for President in 1800, Madison himself devised the strategy of changing Virginia's internal vote from "winner take all" to "each vote counted separately", which broke the tie because John Jay refused to do the same thing for New York and thus lost the election for Aaron Burr. The surviving moral of this story is that it doesn't pay to be fair about anything in politics. Everybody seems to avoid the plain reality that important decisions between nations are made by the nation with the strongest military force. That's crude and unfair, maybe, but unlikely to change much. Which leads to another truism: it's going to be a long time before we can expect strong nations to submit to supra-national control systems. That's why the uniting of thirteen independent colonies in 1787 was so unique, so difficult to achieve, and such a lasting credit to those who made it happen.

http://www.philadelphia-reflections.com/blog/2286.htm


Why Should Nation States Unite?

BIG nations easily gobble up small ones, so small ones band together. As George Washington famously observed, when you are strong the others leave you alone. But other forces make smallness seem attractive, especially if the nation is already uniform in religion, language and culture. Most nations search for an ideal size for both Peace and Prosperity, and find they need two sizes. Both the American Revolution of 1776 and present struggles of the European Union fit a common formula: banding together for military security, then pulling back for greater independence. American experience of a subsequent Civil War eighty years later suggests the margin for error is narrow.

{Europe Colonies}
Europe

Geography doubtless imposes limits for both peace and prosperity. Some nations have therefore banded together for military reasons then split apart in local quarrels, more or less regularly. The thirteen American colonies had been afraid to confront Britannia alone, but somewhat overconfidently took on that challenge as a confederation of thirteen. At the other extreme, little Rhode Island even refused to send delegates to the Constitutional Convention, for fear the other twelve would want to share its toll revenues from the coastal road. Similar possessiveness has not yet been reported about the narrow defile through the northern end of the even smaller State of Delaware. At least they are not morally superior in Delaware, which for decades protected its secrets of mushroom cultivation. Everyone wants Peace and Prosperity: getting bigger discourages predators, but getting smaller offers sole possession of whatever you happen to have. Since the United States grew in jumps through most of its history, it probably learned intangible things from alternating episodes of suddenly too big and then gradually too small. Frederick Jackson Turner's thesis of the frontier as shaper of culture gropes for a fairly similar model. Our treatment of minorities is not ideal, but better than most; we can be moderately proud of our business ethic. These are flawed arguments. We did our best, and it somehow worked out.

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13 Colonies

When ideas of Union first gained traction in two distant continents, both the thirteen American colonies and the twenty-five nations of the Euro zone were afraid of war. The simple American objective was military parity with a common enemy. The nations of the European Union had a longer view; a seemingly endless history of bloody wars sustained their conviction that other wars would inevitably follow unless they did something innovative. National unification on the American model would be ideal, and perhaps the habits of cooperation and trade would lead to it. The unexpected decline of the Soviet empire reduced the immediate threat to peace. Pride may also have led to over-reaching; twenty-five is comfortably larger than thirteen, which up to that time was the largest nation merger to survive. But twenty-five is smaller and thus more manageable than the present American fifty. To begin the difficult process with only monetary union as a start, should produce quick benefits from a source too mysterious to produce much public resistance. Nobody could think of a war started by a monetary dispute.

{Justice Blackmun}
Justice Blackmun

Of course the Europeans would expect to cope with the difficulties of speaking many languages. The American colonies mostly shared a single language. Even their enemy spoke English. In this particular, the Europeans seem to have underestimated the language-induced difficulties of maintaining a common understanding of what their Constitution meant to people. Indeed in American Judicial disputes about Original Intent, we repeatedly encounter the tenacity of people to believe a document says what they want it to say. Staying within a single English language, the inflammatory evolution of U.S. Supreme Court interpretations often turns on subtle differences in meaning of simple words, since vigorous legal advocates think they are paid to marshall every argument weak or strong. Penumbras and emanations from the word "Privacy" in Roe v. Wade force our judges to decide whether the inclusion of a right to abortion within a right of privacy is simply too far from common understanding of English. Both in the discovery of a right to privacy within a Constitution document which does not use the word, and in the inclusion of abortion within that, Justice Blackmun overestimated the capacity of citizens to understand what they did not want to understand. How much more surely, then, would he have overestimated public willingness to grasp his meaning in two-step translations from a foreign language. Since this famous decision is destined to stand or fall, depending on public tolerance for such wordplay, having almost every citizen confidently understanding English has at least some advantage in persuasion about its wisdom.

{Burned at the stake}
Auto-de-fe

By contrast with important language confusions, the "hatreds between nations" so often mentioned as obstacles to unification, seem largely bogus. Argot and slang are commonly invented to conceal the opinions of minority groups. Over thousands of years, this purpose of "jiving" a secret code among conspirators has been perfected exquisitely. It's hard to overcome, easy to teach children. But the memory of actual wars really dies out rather quickly, not least because atrocities are so hideous, mankind wants to forget them. I was seventy years old before someone told me I had ancestors burned at the stake. By whom? By someone who has also been dead for four hundred years, not likely to seem threatening to me. Over the fifty years since the Second World War, I have run into former German and Japanese soldiers; they now seem pretty benign. One American former prisoner of war was forced to stand at attention while his Japanese captor pulled out his gold teeth with pliers; he told this story with a faint smile. It is one of the benevolences of biology that we are born without memories, and a second is the impossibility of remembering the feeling of pain without first dramatizing the experience for future reference. Once actual onlookers stop grinding the grievance axe, it should be possible to get on with devising a European constitution, provided it contains the equivalent of our First Amendment.

{Helen of Troy}
Helen of Troy

It's an important point for an E.U. proposal unifying two dozen different priesthoods and a number of nations wholly defined by the remit of a single religion. A workable constitution for them must contain a strict separation of church and state, because myths, epic poems, and traditions are synthetic, quite different from actual experiences. Helen of Troy may or may not have had a face that launched a thousand ships, but Homer's Iliad certainly glorified more hatred than she did; who can say whether the poem portrays the truth? That's the war side of things; the Odyssey is powerful in evoking the special virtues leading to prosperous nationhood. Because you can't argue or reason with epic myth, it is the many glorifications and condemnations which supply endurance to patriotic myths, easily reducing macroeconomists of the European Central Bank to tears of frustration. Because the best of these epics stand alone as powerful literature, their propaganda strength is difficult to deconstruct with mere logic. Quoting Arnold Toynbee, it is not weaknesses, but overextension of their finest qualities, which usually brings them down.

{Euro zone symbolic}
Euro Zone

While true grievances seldom pose true obstacles on their own, they do often misdirect political leadership from what is best for their countries. European Unification had a primary goal of eliminating future wars, but decided the peace goal was achievable only by indirection, and began first with monetary tools for prosperity. That takes a long time; America was still fumbling monetarily until the Civil War. So while starting with small victories seems a plausible route to big victories, in fact it drains much of the idealism out of revolutions. Even worse, it here made the 2010 financial disaster of the Euro symbolic of hazards on the road to Prosperity, which itself merely seems preliminary to a moderate Peace. At least in a struggle for national security, every day survived is another victory. There is no room in past struggles for Americans to gloat over their superior approach to permanent Union. But a defeat is a defeat, and the Euro mess is a big defeat.

{Ron Paul}
Congressman Ron Paul

From a commentator's perspective, currency matters are difficult to understand and explain. For contrast, the Battle of Normandy is thrilling; every death is the death of a hero. But rises in productivity, the risk implications of volatility, even the way the value of bonds goes down while their interest rate rises, seem hopelessly confusing to a beginner. Worse still, there exists real uncertainty. We now have currency which has no backing in precious metals, and is really just a book entry. That's useful for transactions, less certainly useful for a storehouse of value. Mr. Ron Paul is running for President of the United States challenging the whole Federal Reserve concept, and a possibility must be admitted that he has a grain of truth in his speeches. We trust our bankers to devise a workable system of exchange without gold and silver, and readily admit that Mr. Bernanke knows more than we do. But. The world economy nearly collapsed utterly a few years ago, and you know, Mr. Ron Paul might just have a valid point or two. There has not yet emerged any fit environment for enjoying a monetary Crusade to a World Without War. For striking contrast, go to any Civil War movie and watch those teen aged soldier boys charge up the hill, ready to die for the Union.

http://www.philadelphia-reflections.com/blog/2259.htm


European Common Currency

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Christian Noyer

Philadelphia had the recent pleasure of a visit by Christian Noyer, the Governor of the Banque de France, offering to a Federal Reserve Bank audience a view from inside the Eurosystem's monetary policy. Mr. Noyer was a designer of the Euro, or common currency of Europe. A charming and polished man of education, he brought along a document which hangs in his office, dated June 5, 1779, signed by John Jay on behalf of the Continental Congress, sent to Benjamin Franklin to give to Caron de Beaumarchais. Since Independence Hall is visible from the upper windows of the building where he was speaking, it was a charming touch.

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European Central Bank

The European financial system consists of one monetary policy, set by the European Central Bank, but twelve (soon to be twenty-five) fiscal policies, set by the various governments. This was once thought to represent a major difference from the American Federal Reserve, but in fact it hardly matters. Our fifty component states are not permitted to run deficits, but our federal government runs deficits, plenty of them, and it turns out to make little practical difference if a Central Bank must float bonds to pay for a deficit arriving in one envelope or twelve. What matters is the size of the total. From that starting point, the central bank struggles to modify matters to restrain inflation, or combat unemployment. The main tool at the bank's disposal relates to the fact that governments no longer fear to print more money than they can redeem in gold. They print money, all right, but the spigot is now turned down when inflation begins to appear. In theory, at least, inflation is not possible if the central bank is able to maintain this policy. Of course, if money created in the past comes flooding in from abroad or out of mattresses, there might be a problem. Central bankers seem like terribly powerful people, until you count up the people they can't control. The first are the politicians who create those deficits.

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Taxes Shake

European politicians believe their constituents prize security above all else, a condition known as socialism. High taxes, high unemployment, and slow economic growth are considered more tolerable in Europe than sacrificing pensions, health care, and other features of the social safety net; out of this come government deficits, then maybe inflation. The central bank is told to make the best of it.

Then, there is the long-term bond market, which in the past responded to a flood of money by reducing the value of outstanding bonds, which results in higher interest rates.

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Euro

Recently, however, long-term interest rates have failed to rise in response to rising deficits, and speculation abounds as to why that should be so. It creates uneasiness to hear that the finances of the world are simply a "conundrum". And finally, foreigners will flee from an inflated currency, eventually triggering a devaluation. A few years ago, Argentina refused to devalue, but the result was a devastating recession when their foreign trading partners refused to deal with an unrealistic currency.

A government which refuses to respond to these "signals" from the bond market and foreigners, will be forced to take some undesirable actions. In Europe, it is to oppose globalization of the economy, thereby hurting everybody but especially poor nations. And the internal European unemployment is shifted as much as possible onto the backs of immigrants, even migrants from within the European community. Take that far enough, and you get serious threats to world peace. Even within the European community, many of the policies which protect the welfare state will consciously injure their own economic growth. Reform is resisted.

Many needed reforms are obvious to policy makers in Europe, and the American example would often seem to be convincing. But it isn't, because Europeans terrified of losing their welfare state recognize that the American model includes a large amount of contempt for socialism, no matter how otherwise successful it is. The interesting thing has been that the Scandanavian countries have an equally extensive welfare safety net, but have nevertheless prospered by adopting free-market reforms. There are signs that this experience is beginning to convince Europeans it is possible to work their way out of the dilemmas.

After his talk, which avoided mention of many of these concerns in the mind of his audience, Governor Noyer was even more charming in cocktail-party mode, but one thing made his face turn beet red. When asked what the John Jay letter was all about, he had to admit he hadn't the foggiest. It was just something hanging on his wall that seemed appropriate for a trip to Philadelphia.

http://www.philadelphia-reflections.com/blog/842.htm


Euros and Dollars

{International Money}
International Money

The United States government issues lots of different currencies. We issue ones, and twos and fives and tens and twenties. If you need more one dollar bills, you can walk into any candy shop with a five and the shopkeeper will more or less cheerfully make the exchange without charge. But if you want to change the same five dollar bill for euros, yen or drachma, you need to find an agent in a kiosk and pay a fee of about 3%. The booth or shop of the international money changer will have some sort of electronic means to tell what the rate of exchange might be at any given moment. To extend this idea, if the people at the mint run short of ones, they just print some more, meanwhile removing a comparable number of surplus fives from circulation. No matter how extreme the imbalance, it does not affect the price of dollar bills. That's more or less the idea behind the common currency in Europe, and a major success. All countries of Europe want to join, nobody wants to leave.

But some things are lost in this obvious simplification of financial transactions; it has enemies. For one thing, the Federal Reserve or other central banker can change interest rates instantly, but the rest of the economy has a certain amount of inertia. For example, banks typically deal in 90 day Treasury bills, so it takes them a month or two to catch up with the Federal Reserve as the old bills mature; in the meantime they lose money. Almost all businesses have even longer lags than that. So during the lag periods the national economy experiences inflation or deflation, which may represent the national interest at the moment, but in time things catch up and rebalance about the way they were before the central bank acted. Except for taxes, that is, and this specific attrition is one of the main arguments for eliminating the capital gains tax, or extending special allowances for banks and others who have short-term gains on price changes without effect on underlying values. The matter gets mixed up in domestic politics. Incumbents long for short-term inflation, nonincumbent challengers denounce it. Everybody welcomes a "strong" currency, everyone recognizes that a weak currency sounds pretty bad. Few however could defend their opinion. The people who benefit are the ones who can move fast, because there's usually a brief flurry of inflation or deflation, and then things go backward. People who can move huge amounts of money quickly are apt to make big mistakes in their hurry.

And so it is in the eyes of foreigners. Right now, the American tourist to Paris confronts a taxi charge of $120 for a twenty-minute ride from the airport to the downtown. Everything else, from thirty dollar continental breakfast to two hundred dollar dinners, seems comparably overpriced. Tourists with sticker shock return home to tell their friends all about it, just before the November elections. No doubt it has an opposite effect on Parisian shopkeepers and their acquaintances. But the tourist trade is comparatively minor, compared with major industries. Airbus was once giving Boeing a serious competitive race for airliners, but now Airbus is contemplating possible bankruptcy if currencies do not soon readjust, and Boeing is laughing all the way to the bank. Stop a minute and consider what happens when you buy and sell a whole company. Now it's the reverse, and a group of European investors are considering buying Anheuser Busch, the largest American brewery. The producer of Budweiser beer seems extremely cheap to Europeans, just as the beer itself is cheap for European beer drinkers. And then just consider a personal note: the wife of Senator McCain, running for President, owns a huge chunk of Budweiser distribution. The pillow talk in that family is likely to focus on the unfairness of hostile foreign take-overs.

So, all in all, tinkering with the currency as a direct or indirect consequence of a banking crisis caused by overbuilding houses in the sun belt, has potentially fearsome consequences. They must be added to effects on commodity prices, and revolutions in the banking system. Those two issues are next to be considered.

http://www.philadelphia-reflections.com/blog/1457.htm


A Single International Currency?

{$100 bill}
It's Only Paper

The Economist, printed in London, refers to the United States in its October 17, 2011 edition as the "World's largest currency union", but goes on to state it only became a true currency union in the Presidency of Franklin Roosevelt. That's sort of the case, even though most people suppose Alexander Hamilton unified American monetary affairs with the Compromise of 1790 which among other things traded the nation's capital away from Philadelphia. No, Hamilton only unified the Revolutionary War debts, which to be sure, at that time were the main debts of the new nation. In time, the country and the economy grew in size until our currency was no longer unified, because the individual states and banks were legally free to issue their own money. Nicholas Biddle of the Second National Bank had an irritating habit of buying up the circulating currency of a weak bank, and presenting it as a bagful to the teller's window. If the bank was really overextended, it then went bankrupt, and other marginal currency-issuers could observe a bitter stress test about printing unreserved paper money. According to The Economist, the main stabilizer was not migration of money, but migration of workers. Unemployed people by the many thousand would move to a state or territory with a labor shortage, a solution made practical by the extremely low cost of real estate. In Europe, a far more practical adjustment remains the moving of funds from one state to another, although there is today enough migration across the Mediterranean to demonstrate how disruptive it is to mix extremes of unwelcome language, religion and culture. In comparing the American and European experiences we thus have two quite different systems to compare, although distinctive conditions often bring out the main issues. The problem of maintaining a common currency union for example is hard enough, while the Europeans have the similar but not identical problem of devising a stable one from a large number of differing ones.

After three hundred years of fumbling America has perhaps muddled through to a currency union that works. Resting on the fact that most Americans are either debtors or creditors, and the rest mostly don't care, the quantity and value of American dollars since 1913 have been negotiated between banking and the U.S. Treasury with the Federal Reserve as umpire. During that last century we have endured two major depressions and a dozen recessions, abandoned the gold standard, and fought a number of wars; but the American currency union has never given serious signs of weakness. It would appear that the main problems with currency unions appear at the beginning, in putting them together. After the transition, things appear to get easier. Bank profits are improved by higher interest rates, while all governments, perpetually in debt, want lower ones. Ultimately of course the real tension is between the creditors and debtors, but banks and Treasury seem adequate surrogates. Most creditors place trust in the incentives of banks to prevail, debtors trust government; both sides should have learned trickiness in endless negotiations is futile. What was once a battlefield, is now mostly peaceful; these people actually respect each other. Many people may occasionally dislike an outcome, but all acknowledge the tension produces legitimate compromise.

{http://www.philadelphia-reflections.com/images/frbpa.jpg}
Match Wits with Ben Franklin

Aside from some "don't ask, don't tell" mystery that somehow compels assent by regions of the country who feel betrayed by agreements their representatives have made, negotiating postures are pretty simple and clear. It is safely assumed the government wants to inflate; all governments have done so for thousands of years. Therefore, the basic Federal Reserve policy of targeting interest rates to restrain inflation is probably a concession to banks. Banks would mostly want the highest rate that does not cause a recession. Debtors do not mind lower rates leading to just a little inflation, hoping to pay off their debts later with cheaper money. Government, acting as agent for debtors, additionally knows that rampant inflation loses elections and occasionally, as in inter-war Germany and Austria, destroys the middle class. So, with everyone else resisting inflation, debtors must be satisfied with 2% annual inflation. That's arbitrary, reflecting its origin in the haggling process. Inflation-targeting plus two percent; that's the system.

If only there weren't all those other countries in the world. If they inflate or deflate, we could just float our currency exchange rate to maintain international trade; that isn't so bad, although frequent readjustment of prices is a costly nuisance. But if some country freezes its currency at an unrealistic price, speculators will move money around to take advantage. Enter Gresham's Law (commonly expressed as "Bad money drives out the Good".) Gresham's original phrasing is actually more apt: "When two currencies of unequal value circulate together, the good currency quickly disappears." So, when truant governments cheat on currency values, well-behaved countries find their own currency getting hoarded. Potentially, that leads to currency shortages, as happened to Argentina when Brazil devalued in 1999. So, countries running an honest currency nevertheless feel pressure to print more; Brazil "exported its inflation" to Argentina. Plenty of wars have been started for less provocation. When something causes that extra money to come out of hiding, there will be spreading inflation, notwithstanding attempts to isolate foreign inflation by the central banks of more responsible nations. Furthermore, runaway inflation can unsettle governments, as it did in the Argentina example, going from one extreme to the opposite. There is thus wide-spread sympathy for currency unions, even though locally independent currencies can sometimes better adjust to local commotions, typically by devaluing the currency and then rejoining the currency union at a more realistic price. The Federal Reserve in our case would be forced to raise interest rates sky high, promptly triggering housing and stock market crashes. So the point returns; if our Federal Reserve system works so well, why can't everybody do the same thing on an international level. In fact, what's the matter with having one big world currency?

Maybe, some say, we could have a World Reserve Bank, issuing a common international currency. What we now have in place is U.S. money serving as a Reserve Currency for the world. The force behind this system is again Gresham's Law, that since we have the strongest currency in the world, when it circulates in other countries in the company of weaker local currencies, it quickly "disappears". That is, it is hoarded out of sight until nothing but local money remains visible. Under these circumstances, only the United States with the world's Reserve currency is able to print money without creating inflation. Unfortunately, that implies that if it should ever weaken, it will quickly reappear and flood the host country with inflation, whereupon the host government will ship it all back to enjoy your own inflation, thank you. Thus, being the reserve currency for the whole world allows you to have some inflation and ship it abroad, but if it ever comes back home, there could be a painful disruption. The last time this happened was when the British Pound surrendered the reserve role to the American dollar. It was a bad time for the British economy.

The question periodically arises whether it might be better to use a "basket" of currencies as the reserve against temporary monetary shortages, with the United States trading away some of its free ride on inflation in return for reducing the risk of someday getting it all back at once.

Using a basket of everybody's money as a pool of international reserves might smooth out the tidal waves, but it probably would not create the same stability from tempests we enjoy with the Federal Reserve. If you regard a country's money supply as one big short-term bond, then a basket of currencies is a basket of bonds, issued by a world full of debtors. In that situation, pressure for world-wide inflation is inevitable. In a world with nationalized banks and/or subsidized banking systems, it is hard to imagine any international banking voice without a strong political component. Mandatory contributions of gold bullion might be considered, but it is hard to think of any adequate substitute for the flexibility of adversary tension between permanent creditors and permanent debtors. The situation is not permanently hopeless however, just remote. The enduring risk is that some nations always have more to lose from a collapse of trade than others. Continuing improvement in world economic conditions may one day make a unified world currency feasible. As St. Augustine famously said, "Make me chaste, but not yet."


REFERENCES


Runaway America: Benjamin Franklin, Slavery, and the American Revolution, David Waldstreicher ISBN-13: 978-0809083152 Amazon

http://www.philadelphia-reflections.com/blog/825.htm


Too Much Money

The Gold Rush

Globalization may well have created a thousand billionaires, but its benefits to poor people were greater. As a guess, five hundred million desperately poor people were lifted out of poverty, and eventually it may be several billion. For a certainty, we will soon need a new definition of poverty, which only a few years ago was to subsist on less than a dollar a day. Rich or poor, these lucky people were not the objects of charity, but the visible beneficiaries of enormous wealth creation, surely the greatest gold rush in human history.

If they buy guns and bombs (or narcotics) with their new money, we may not be so happy about its unintended consequences. So far, however, the major unintended consequences have been benign upheavals, like the rapid spread of the computer and internet revolutions, the extension of life expectancy and literacy. These reasonably benign side-revolutions have bounced back as accelerators of the boom. The unit cost of transactions has plummeted; nerdy mathematicians have advanced into the murky mist of derivatives. No one doubted self-seeking bosses would abuse the extraordinary insights of their intellectual superiors, and they did, indeed. It's probably true that wise observers predicted this would all end in tears. And it did.

{William Bingham class=}
Credit Default Swaps

We are now in the midst of the usual witch-hunt for perpetrators, because we have a national election every four years. Both political parties are planning to spend a billion dollars accusing each other, so the accusations will surely get louder before they calm down. But in the spirit of directing the anger toward more productive targets, it should be remembered that harm to the public usually originates as incompetence, rather than greed. About five years before the crash, for example, I found myself adrift in a convention of bank officers. Within fifteen minutes, I satisfied myself that not one vice-president in the room could offer a coherent definition of a derivative. The general public still cannot define it, but everybody thinks he can recognize greed: it's someone with more money than you have. A few weeks before the initial crash in August, 2007, I was made aware that things called Credit Default Swaps were in circulation in the amount of twenty-five trillion dollars. It was impossible for me to find anyone or any search engine which could tell me what these confounded CDS things were, even though their quantity exceeded what I understood to be the national debt of the United States. And their quantity was doubling every few months. A few months later, indeed, it was made clear that the national debt was far larger than anyone thought. There's a great temptation in a situation like this to demand that Congress pass a law to slow things down. Yes, and while they are at it, they might as well sweep back the ocean with a broom.

Federal Reserve

To a certain extent, the recent cluelessness of banks has to do with expanding their size, computerizing the deposit and payments systems, and reducing the average branch bank to a single manager with either computers or new hires to help him. The information you need is available, but often in the home office a thousand miles away. Changes of this sort are hard to keep up with, and the bank officers dislike it, too. But the plaintive defense was recently given to a Committee of Congress, seen on television. "As long as the music keeps playing, we have to keep dancing."

Over in the investment banks, there are hundreds of very smart, very aggressive young fellows sitting at desks crowded together with three electronic monitors apiece, talking excitedly on the phones with their new best friends in foreign countries. Their job is not to know everything, but to know how to do something, and perform it very rapidly. Much of their knowledgable talk is just bluffing; no one is sure what the other fellow knows. They all know the situation can't last; perhaps they can get promoted before some changed premise catches up with them. This isn't exactly greed, it's called high pressure. At any unexpected moment, that guy over in the corner office can come out and say, "You are all, all of you, fired as of this moment." It probably isn't his fault, either.

The fundamental situation is that depository institutions are being squeezed by technological change, and the blameless fact that investment banks can substitute their services at a lower cost because the money is accumulated by selling bonds in large denominations. The depository banks must try to accumulate deposits one by one in a recession, with interest rates held low for macroeconomic reasons dictated by the Federal Reserve. To level the playing field, depository banks have access to deposit insurance, which tempts them into high risk lending. Nobody can get hurt when it's all insured, Right? Every once in a while someone sends cold chills down the depository bank spine by calling for the abolition of deposit insurance, on the grounds that it promotes moral hazard. On the other hand, the investment banks are lobbying heavily to have deposit insurance extended to them, and they may well get it for their money market funds. This is all a pretty artificial controversy. The problem isn't evil, or deposit insurance, or being too big to fail. It's the nature of the struggle. Two different ways have been chosen to assemble capital. When one of them wins, the other knows it will die.

Let's not confuse this any further. The point of the discussion is to convey the immense pressure being placed on every minipixel of the financial system, by a gold rush taking advantage of the changes wrought by globalization of the world economy. Somewhere, a bubble will appear. It happened to be in real estate, as it often is in money panics. And if a bubble grows, somebody will pop it. Is it all his fault, too?

http://www.philadelphia-reflections.com/blog/2264.htm


Union, Now and Forever

BIG nations gobble up small ones, so small ones band together. As George Washington observed, when you are strong the others leave you alone. But other forces sometimes make smallness seem more attractive, especially if the nation is already uniform in religion, language and culture. Nations search for an ideal size for both War and Peace, and discover they praise two incompatible sizes. Both the American Revolution of 1776 and today's struggles of the European Union fit a common formula: banding together for military security, then pulling back from declining Liberty. American experience of a Civil War after eighty years under the Constitution suggests the margin for error is narrow. And enduring; even in the Twenty-first century it is striking that both little Scotland and that little bit of little Belgium that is Flemish seem willing to sacrifice major economic benefits for what seems to outsiders a minor step for Liberty. But the whole point of the Constitutional Convention then seems to emerge: Nine years previously, thirteen separate sovereignties had been more or less hustled into a military alliance by the appearance of a hostile British fleet. That war was now over, the thirteen had grown accustomed to living together, but the Articles of Confederation had not foreseen a large nation clearly enough in 1776. The Articles did not even provide for an executive branch. In the chaotic conditions of 1787, a calmer choice could be made between breaking apart and unifying, for a different set of reasons based on Peace and Prosperity rather than war: Either surrender some aspects of state power to a real union, or let each contentious state confront its future, unsupported. In many ways it was the vision of Liberty which changed between times of peace and times of war. In 1860 the stakes were higher than in 1787 but the issues were mixed. Industrializing states in the northern part viewed the Union as an economic opportunity. Purely agricultural southern American states were not so sure; in the end, preferring the older set of rules, they took their leap. To the amazement of Southern leaders the North was ready to die to preserve that Union, and so the demands of warfare reasserted themselves.

{Europe Colonies}
Europe

Geography doubtless imposes variable limits for both war and peaceful prosperity, anywhere. Some nations have therefore banded together for military reasons then split apart in local quarrels, more or less regularly. Thirteen American colonies had been afraid to confront Britannia alone, but somewhat overconfidently took on that challenge as a confederation. At the other extreme, little Rhode Island even refused to send delegates to the Constitutional Convention, fearing big neighbors more than remote British rule. Fortunately, similar possessiveness about local perks was unable to collect enough political power to dominate other states. After a year by the time of the state ratifying conventions, however, it was a closer call. Peace and prosperity: getting bigger discourages predators, but getting smaller offers sole possession of what you have. Since the United States grew in jumps through most of its history, it probably learned intangible things from alternating episodes of being too big and then too small. Frederick Jackson Turner's thesis of the advancing frontier as shaper of culture is not greatly different in the essence of its argument.

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13 Colonies

When ideas of Union first gained traction, both the thirteen American colonies in the Eighteenth century and the twenty-five nations of the Euro zone in the Twenty First, were dominated by the memory of war. The American objective was the simple one of military parity with a common enemy. The nations of the European Union had a longer view; a seemingly endless cycle of bloody wars sustained their conviction that other wars would inevitably follow unless they did something innovative. National unification on the American model sounded ideal but difficult. Perhaps the habits of cooperation and trade would lead to it. The unexpected decline of the Soviet empire further reduced the fear of war. Pride may also have led to over-reaching; twenty-five is comfortably larger than thirteen, which up to that time was the largest nation merger to survive. But twenty-five is smaller and thus more manageable than the present American fifty. To begin the process with monetary union might produce quick benefits from a source too mysterious to produce much public resistance. Nobody could think of a war started by a monetary dispute.

{Justice Blackmun}
Justice Blackmun

Of course the Europeans expected difficulties from speaking many languages, but they probably still underestimate how far the legal profession has already gone in confining nuanced words to a single meaning; it is essential to their trade. When many languages split off from a common stem, many unaccepted interpretations re-emerge when they are later re-combined. Even without the nuance problem, translation into many languages is a serious expense, which is at least as burdensome as currency exchanges were among multiple sovereignties. By contrast two centuries earlier, the American revolutionaries shared a single language, but soon found espionage was an unusually serious problem. Even their enemy spoke English, so sometimes improved clarity itself creates unexpected problems. Indeed, in American disputes about Original Intent we repeatedly encounter the tenacity of people believing a document says what they want it to say. Vigorous legal advocates think they are paid to marshall every argument weak or strong. Staying within the English language, the evolution of U.S. Supreme Court interpretations often turns on subtle differences in meaning of simple words. Penumbras and emanations from the word "Privacy" in Roe v. Wade soon force our judges to decide whether abortion within a right of privacy is simply too far from common understanding of English, in a double way. Both in the discovery of a right to privacy within a document which does not use the word, and then in the inclusion of abortion within that, Justice Blackmun clearly overestimated the capacity of excited citizens to be flexible. Much more surely, he would have overestimated public willingness to grasp his meaning in two-step translations of a foreign language. Since this famous decision is destined to stand or fall, depending on public tolerance for such wordplay, having almost every citizen confidently understanding English is at least one advantage. Parenthetically, we will need every advantage possible. The really serious box which Justice Blackmun put us in, was to invent a Constitutional mandate which thus can only be compromised in a Constitutional amendment. In almost every other conflict, the system of checks and balances permits either the Congress or the state legislatures to soften the conflict with conciliatory modification. Constitutional amendment is already difficult to achieve; inflaming the religious passions of the forty-odd bodies who must agree to amendment makes amendment nearly impossible.

{Burned at the stake}
Auto-de-fe

By contrast with important language confusions, "hatreds between nations" are often mentioned as an obstacle to unification but the claim seems largely bogus. Argot and slang are commonly invented to conceal the opinions of a minority group. Over thousands of years, this purpose of "jiving" a secret code among conspirators has been perfected exquisitely. It's hard to overcome, easy to teach children. But the memory of actual wars really dies out rather quickly, not least because atrocities are so hideous, mankind wants to forget them. I was seventy years old before someone told me I had ancestors burned at the stake. By whom? By someone who has also been dead for four hundred years, not likely to seem threatening to me. Over the fifty years since the Second World War, I have run into former German and Japanese soldiers; they now seem pretty benign. One American former prisoner of war was forced to stand at attention while his Japanese captor pulled out his gold teeth with pliers; he told this story with a faint smile. It is one of the benevolences of biology that we are born without memories, and a second is the biological impossibility of remembering the feeling of pain without first re-dramatizing the experience for future reference. Once actual onlookers stop grinding the grievance axe, it should be possible to get on with devising a European constitution, provided it contains a meaningful equivalent of our First Amendment.

{Helen of Troy}
Helen of Troy

It's an important point for a proposal unifying two dozen different priesthoods and a number of nations wholly defined by a single religion. A workable constitution for them must contain a strict separation of church and state, because ballads, epic poems, and traditions are synthetic, quite different from actual experiences. Helen of Troy may or may not have had a face that launched a thousand ships, but Homer's Iliad certainly glorified more hatred than she did; who can say whether the poem portrays the truth? That's the war side of things; the Odyssey is powerful in evoking the special virtues leading to prosperous nationhood. Because you can't argue or reason with epic myth, it is the many exaggerated glorifications and exaggerated condemnations by them which supply endurance to patriotic myths, easily reducing macroeconomists of the European Central Bank to tears of frustration. Because the best of these epics stand alone as powerful literature, their propaganda strength is all the more difficult to deconstruct with mere logic. Quoting Arnold Toynbee, it is not weaknesses, but overextension of their finest qualities, which usually brings nations down.

{Euro zone symbolic}
Euro Zone

While true grievances seldom pose obstacles of their own, they do often misdirect political leadership from what is best for their countries. European Unification had a primary goal of eliminating future wars, but its leaders decided the peace goal was achievable only by indirection, and began first with monetary tools for prosperity. That takes a long time; America was still fumbling monetarily until the end of the Civil War. So while starting with small victories seems a plausible route to big victories, in fact it drains much of the idealism out of revolutions by avoiding the cataclysmic issues which justify great sacrifices. Even worse, it here made the financial disaster of the Euro symbolic of tawdry hazards on the road to Prosperity, raising issues of corruption and self advancement, rather than idealistic sacrifice. At least when you struggle for national security, every day you survive is another victory. There is of course no room in past struggles for Americans to gloat over their superior approach to permanent Union. But a defeat is a defeat, and the Euro mess could become a big defeat.

{Ron Paul}
Congressman Ron Paul

From a commentator's perspective, currency matters are difficult to understand and explain. For contrast, the Battle of Normandy is thrilling and awe-inspiring; every death is the death of a hero. But rises in productivity and the risk implications of volatility, seem hopelessly confusing to an economics beginner. Worse still, there exists real uncertainty among experts. We now have currency which has no backing in precious metals, and is really just a book entry. That's useful for transactions, less certainly useful for a storehouse of value. Mr. Ron Paul ran for President of the United States challenging the whole Federal Reserve concept, and a possibility must be admitted that his speeches have a grain of truth. We trust our bankers to devise a workable system of exchange without gold and silver, and readily admit that Mr. Bernanke knows more about it than we do. But. But the world economy nearly collapsed utterly a few years ago, and you know, Dr. Ron Paul might just have a valid point or two. Europe has not yet emerged into a fit environment for enjoying a monetary Crusade to a World Without War. For striking contrast, just go to any Civil War movie. And watch those teen aged soldier boys charge up the hill, ready to die for the Union.


REFERENCES


A Study of History Arnold J. Toynbee ISBN-13: 978-0195050806 Amazon

http://www.philadelphia-reflections.com/blog/2234.htm


Common Currency Without Common Government Spells Trouble

When the Europeans decided to edge gradually into united nationhood, step by step, starting with a unified currency, Milton Friedman was immediately scornful. Mr. Friedman had won a Nobel Prize for his work in monetary matters, and told the world that he didn't think the Euro would last ten years. At the end of ten years, it began to look as though he was right. Since even pirates had once been willing to accept Spanish gold coins at face value, it takes a little explaining to understand why it makes any difference whether the issuing countries of the Euro are yoked in common nationhood.

http://www.philadelphia-reflections.com/blog/2287.htm


Axioms for Nations

Although the nations of the world are still a long way from agreement on a United Nations or any other set of supranational rules, a surprising amount of consensus has evolved over the centuries. Using the example of the axioms underlying Euclid's geometry, a few basic assumptions have to be made, which cannot be proven; change one of those axioms, and the whole structure of governance changes.

Boundaries of the state. A group of some sort may form a close association, but unless it stays within stated boundaries, it is a Tribe. At the Treaty of Westphalia in 1648, most of the European tribes agreed to stated boundaries, and those boundaries define nations. Unfortunately, former residents of the bounded area may dispute the ownership. Even when there are no known descendants of former residents, the title of current residents ultimately rests on tradition and the threat of force.

Citizenship. Somewhat greater variation is seen in the definition of a citizen, but most nations confer citizenship to children of citizens, to those who were born within the nation's boundaries, and to still others as defined by the rulers of the nation.

Ownership of real estate.

How is the ruler chosen>

Who makes the day to day rules, who enforces them?

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Perils of Sovereignty

New blog 2012-07-13 19:51:46 contents

http://www.philadelphia-reflections.com/blog/2303.htm


Africa Comes to the Schuylkill

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Ghazvinian book

A journalist, John Ghazvinian, recently toured the many countries of Africa, wrote a book about it and carried his message to the Right Angle Club of Philadelphia. Philadelphia does not think of itself as particularly involved in oil matters, or African ones. But the fact is the refineries on the Schuylkill down by the airport generate two thirds of the gasoline now used on the East Coast, and right now it mostly comes from Nigeria. There was a time when the crude oil coming to Philadelphia came from Venezuela, but politics are a little unpleasant there at present, and anyway Venezuelan oil is heavy and full of acids. The refineries which specialize in that kind of heavy oil are on the Gulf Coast. Long before the Venezuelan era, the Philadelphia refineries were constructed to refine crude oil from upstate Pennsylvania. They were once the main source of dominance of the Pennsylvania Railroad, because oil refining from Bradford County gave the Pennsy a return freight, whereas the competitive railroads running out of New York and Baltimore had to return from the West without cargo.

{Sahara Dessert}
African Map

There are 54 countries on the continent of Africa, quite different from each other in character. One dominant characteristic of Africa is its lack of natural ports, and even the Mediterranean ports are cut off from the rest of the continent by the huge transcontinental stripe of Sahara desert. Major wars and famines, monstrous genocides, unspeakable cruelty and poverty go on there without much notice by the rest of the world.

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Nigeria

The largest country in Africa is Nigeria. Anyone with even minor dealings with Nigeria soon sees that corruption and dishonesty pass all Western imagination, and they have serious tribal warfare as well. The discovery of large deposits of oil in the region faced the international oil companies with a rather serious difficulty. For instance, Shell Oil has had over 200 employees kidnapped for ransom, and is seriously contemplating abandoning its whole venture. At the moment, corruption is coped with by constructing oil wells a hundred miles out in the ocean.It's almost true that the huge tanker ships make from Philadelphia and return, without the crew talking to any natives of Africa.

We hear that genocide is in full bloom in the Sudan, and that poverty in that country similarly passes belief.

{Chad Poverty}
Chad Poverty

They have oil in the South of Sudan, so we may hear more of it. Chad has poverty and oil, and civil war. They have a big Exxon facility, but there isn't a single gasoline station in Chad. At the moment, Angola has paused in its enormous civil war, which killed millions, and Chevron will surely encounter unrest before it is done. Gabon appears to be extremely prosperous, from oil money of course, but they are being ravaged by the Dutch Disease, of which more later.

Apparently, Equatorial New Guinea sets some sort of record for wild behavior. It has lots of oil, and a strong Chinese influence. The current

{Mbasogo and Jintao}
Mbasogo and Jintao

President of Equatorial New Guinea got his job by shooting his uncle. But don't feel too sorry for the uncle, who used to have an annual Christmas morning celebration, consisting of herding his enemies into a football stadium, and shooting them for the edification and entertainment of the populace. After listening to Mr. Ghazvinian, it seems small wonder that so few American tourists, or journalists, or even missionaries, manage to complete extensive African excursions. As everyone notices, if you don't have journalists, there is never any news.

Let's turn to the Dutch disease,

{David Ricardo}
David Ricardo

of which Africa currently displays many examples likely to torment economics students for decades after Africa eventually rivals Houston. Let's start with David Ricardo, who electified the Nineteenth Century world of economics with his principle of comparative advantage. Ricardo pointed to the obvious truth that always and everywhere a nation does best for itself by identifying its best economic feature and then sticking to it. If every country wakes up and does that, every country must then trade with its neighbors for other things it isn't so suited to make. Consequently, tariffs and trade barriers are a hindrance for everyone, in time impoverishing all nations in the cycle, whatever short-run advantages of tariffs may seem enticing.

{gas north sea}
North Sea Gas

So far as I know, Ricardo was quite right, but someone had better hurry up and reconcile his underlying premise of comparative advantage with the Dutch Disease. The Dutch disease was identified and named by an anonymous writer for the London Economist about thirty years ago. Noticing that the Netherlands experienced a marked worsening of its general economy after the discovery of North Sea gas deposits, the observer for the magazine concluded that sudden accumulation of wealth in the gas industry led to a rise in the value of the Dutch currency, soon making it impossible for non-gas industries to export, unable to compete at home with now-cheaper foreign imports. Naturally, investors rushed to invest in gas, sold their holdings in other industries, and Holland was propelled in the direction of a one-industry economy, quite at the mercy of fluctuating prices of gas. Thus was the Dutch Disease born, and Ricardo's principle of comparative advantage exposed to quite a severe challenge from which it has not completely recovered. This is important, so how about a simpler description: When gold is discovered, people drop tools to have a gold rush. Wealth lost from dropping tools is greater than wealth gained from the gold.

Fear of the Dutch disorder seems to be the reason why the Chinese are buying our Treasury Bonds, the Japanese engaging in the astonishing "carry trade," and the Arabs buying American private equity funds. The common strand through all these schemes is this: By sending their bonanza savings abroad, they "sterilize" them from their tendency to force their currency upwards. They are exporting inflation, but also endangering their own struggling non-bonanza industries, which are the main hope for diversifying their economies and getting rid of the Dutch effect. Somewhere during this balancing act, politicians get involved, and make things worse. So they call in their generals and admirals, to explore solutions we prefer they were not in a position to explore. Simpler description: When you discover oil, inflation soon follows. And all too often, revolution follows that.

The 1787 the American Constitution unknowingly cured thirteen cases of the Dutch Disease, by imposing absolute freedom of interstate commerce. After eighty years, the benefits of this national union would persuade the North to bleed and die for it. Although the Confederacy thought they were fighting for their way of life, meaning slavery, even the Southerners today recognize they are better off in a Union. Unfortunately today, the European nations are still having a hard time believing the benefits of union could possibly outweigh their allegiances to language, religion, and the wartime sacrifices of their ancestors. They are very wrong, but we are wrong to sneer at them. Except for maybe Switzerland, it is difficult to name another instance in all of history where several independent states gave up local sovereignty for the benefits of a diversified economy with local pockets of comparative advantage. Let's restate it again: the Dutch disease is a result of sudden single-industry prosperity in a country too small to control it.

By the way, what eventually happened to the Dutch? It seems likely that absorption of little Holland into the European Common Market helped dilute the corrupting effect of gas prosperity. It suggests the possibility that Dutch can be reconciled with Ricardo through the common denominator of reduced national barriers to trade and currency-- reduced sovereignty in a milder form. But it's a hard slog. Maybe we could envision annexing Alberta to soften the commotion of oil tar, but it takes a lot of imagination to see the amalgamation of China and India, any time soon. There may thus be nations too big to merge, but nevertheless it would probably be less destabilizing to merge with all of Canada than just with Alberta if you overlook the obvious fact that it is easier to persuade a small country than a big one. Just kidding for the sake of example, of course, since Canada shows no interest in the idea.

Meanwhile, take a look backward from the highway overpass the next time you travel to the Philadelphia Airport. There's a lot more going on in those refineries than just black liquid flowing into steel pipes.

http://www.philadelphia-reflections.com/blog/1261.htm


What Is the Purpose of a National Constitution?

13th Century Magna Carta

NATIONAL constitutions are mainly an outgrowth of the 18th Century Enlightenment, even though similar features are to be found among ancient legal codes. Those who trace the origins of the American constitution to the 13th Century Magna Carta will usually point to a central sentence of clause 39:

No free man shall be arrested, or imprisoned, or deprived of his property, or outlawed, or exiled, or in any way destroyed, nor shall we go against him or send against him, unless by legal judgement of his peers, or by the law of the land.

American Constitution

That's a pretty good beginning, a good example of a needed legal principle, but unrecognizeable as what we would today call a Constitution. It states what a government may not do, but does not define the nature of a government which does the job best. Nor do even the many Enlightenment philosophers of government take that final step of outlining where their notions should take us, until the American Constitution had been written and defended in the Federalist papers. Nowhere among the writings of Montesquieu (The Spirit of the Laws, 1748), Catherine the Great (Nakaz, Instructions to the All-Russian Legislative Commission, 1767), Diderot (Observations About Nakaz, 1774), James Madison (1787), John Dickinson(1763) or Gouverneur Morris(1787) can there be found much tightly described definition of a constitution. Certainly there is no definition within the writings of Adam Smith, if we look for rule-making among Enlightenment thinkers whose ideas were influential on the 1787 Philadelphia document. The American constitution was the product of many minds, before and after 1787. The outlines of its final form converged, and emerged, from the Constitutional Convention of the summer of 1787, with Gouverneur Morris as the penman of record. To him we certainly owe its succinctness, which is a main source of affection for the document. That probably understates matters; in his diary of the secret meetings, James Madison records that Gouverneur Morris rose to speak about 170 times, more than any other delegate. Lots of thought and debate; ultimately, few words.

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Sir Francis Bacon

The Elizabethan Sir Francis Bacon has the greatest claim on devising a theory of law and law-making in the Anglosphere tradition. But his elegant modification of Galileo's scientific method, the English Common Law, is more a methodology for creating good laws than an outline of a nation's legal principles. Anyway, tracing the American Constitution back to an underlying British one tends to stumble when the British Constitution fails to meet a definition which would include our own. The British Constitution is said to be "unwritten" to the degree it is a consensus of revered documents. It can be amended by Parliament at will, has a variable history of defining just who is covered by it, and in order to define constitutional principles seems to rely on sentences extracted from difficult context. If the two constitutions had been written and compared at the same time, one would say the British had sacrificed coherence out of respect for tradition. In fairness, some features of the American constitution are also perhaps unnecessary for every constitution, but by surviving as the oldest constitution of the modern form, have become its model. That would be:

A set of principles governing the legitimacy of a nation's laws, and firmly standing above them. It defines its own domain, geographically and by membership of a defined citizenry. Except as otherwise defined, it supersedes all other governance within its domain. It defines and defends its own origins. It includes a description of how to amend it, which is intentionally infrequent and difficult. It goes on to outline the structure of the laws it regulates, with subtle modifications made to channel the type of power structure which will govern.

In the American case, history and culture generated several other instabilities so central they justified heightening the difficulty to amend them to a Constitutional level, thus conferring undisputed dominance over competing principles of governance. That would be:

A separation of government powers weakened all potentially offending branches of government, and thus enhanced citizen liberty. A separation of church from state, for like purpose. A right of citizens to bear arms, to strengthen citizens' defense against internal or external attack, and perhaps also warning that revolt must be possible, even endorsed, as some final extremity of protection for citizen sovereignty.

{William Bingham class=}
Russia's Catherine the Great

It enhances our comprehension to contrast the outcomes of competing 18th Century implementations of the Constitution idea. Russia's Catherine the Great proposed a constitution steeped in the traditions of the Enlightenment, but ultimately designed to define and strengthen the role of the monarch. Denis Diderot her French protege recoiled at this viewpoint, substituting other views resembling those of Jean Jacob Rousseau. He opened Observations About Nakaz his commentary to the Queen, with the following declaration:

There is no true sovereign except the nation; there can be no true legislator except the people. Whether looking back to the English Civil War, or forward to future disputes between the Executive and Legislative branches, it makes clear the Legislative branch was dominant, with the Executive branch acting as its agent.

{William Bingham class=}
Denis Diderot

With this ringing warcry, the French model nevertheless ushered in the extremes of the Terror, the Guillotine, and the Napoleonic conquests. The consequences of the French constitution undermined world confidence in the benevolence of public opinion, at least deeply confounding those for whom democratic rule was not totally discredited. Once more new life was breathed into allegiance for the monarchy, military rule, and dictatorship. Public opinion, it seemed, was not either invariably benign or comfortably far-seeing. The noble savage, mankind naked of tainted civilization, was not necessarily wise or worthy of trust. Edward Gibbons, the 1776 author of The Decline and Fall of the Roman Empire was pointing out where it all might lead, if we completely believed in the collective goodness of the human condition. At the least, the failure of the French Revolution complimented the viewpoint of the Scottish philosopher, Adam Smith, who also in 1776 emphatically urged a switch in that reliance toward a sense of enlightened self-interest, as follows:

It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest.

{William Bingham class=}
Terror, the Guillotine,

It is not surprising that Diderot rejected the Leibniz view of things that "All is for the best, in this best of all possible worlds." And, in view of his dependence on Catherine, not surprising he did not publish his rejection of it until 1823. Thomas Jefferson was in France as ambassador during the time of the American Constitutional Convention, fearing to confront George Washington; and likewise keeping his conflicting views private for several years. Eventually they surfaced in the creation of an anti-Federalist political party along with the conflicts which kept the new nation in a turmoil for the following forty years. It is surely a testimony to the strength of the Constitution's design that the country was able to shift between such extreme governing philosophies but still hold together without changing the governing statement of purpose. Indeed, it is plausible to contend that our two political parties still continuously debate the useful tension between these two differing opinions.

http://www.philadelphia-reflections.com/blog/2231.htm


Old Articles (of Confederation) for Old Europe

SEVERAL years ago, I attended a public meeting at the Federal Reserve, surrounded by well-dressed strangers. At a contentious moment in the discussion, the man next to me rose and announced he was the Finance Minister of a large European nation and had a prediction to make. Within twenty years, he believed, there would only be three economically functioning nations in the world: America, India, and China. Since he was sitting next to me, I asked him the obvious question: what about Europe, what about Japan? He shrugged me off, as if the question was too stupid to answer. As things have turned out, maybe it was.

http://www.philadelphia-reflections.com/blog/2230.htm


World Finance, Columbus Day 2008

{Prime Minister Gordon Brown}
Prime Minister Gordon Brown

WITH voters watching three weeks before the 2008 American presidential election day, finance ministers and their political masters met to decide a basic question: dare they risk disaster to save the existing system, or play it safe by sacrificing small banks to rescue big ones? That is, guess if the situation is so bad only strong rowers can be allowed in the lifeboat, or whether things are really manageable enough to try to save everybody but at the risk of worse consequences for failure. For example the credit default swap mystery; there are $60 trillion notional value insurance policies in existence to cover $20 trillion of bonds. Is that massive double-counting, or an actual disaster so severe it makes every other consideration trivial? Answer quick, please, the ship looks like it might sink. At first it seemed strange a Labor government in England would propose saving only the strong, until you realize that Prime Minister Brown is protected from his Left, while the Democrats in America want to use a fairness argument to win their election. A Republican lame-duck president must do the deciding, a man who has been shown to be both a tough politician and a fearless gambler; playing things safe is not his style. The Dow Jones average soared a thousand points in a day's trading on the prayer that things were finally under control. But take a look around.

Little Iceland and Switzerland are proud to house some enormous banks. But if those banks approach failure, their homeland treasuries are far too small to bail them out.

On the other hand, little Hungary has a negligible banking system, so Hungarians commonly borrow money from foreign banks. The national currency devalued by half in this crisis, so most Hungarian mortgages doubled in price. Reserve systems based on national governments suddenly look obsolete.

Try another approach. Little Ireland went ahead and guaranteed all deposits in its financial institutions. Money from England and the rest of Europe immediately poured in to enjoy that guarantee, forcing other grumpy nations to match the unwise Irish offer. There's a sense that nations are losing control of their affairs.

Europe consists of 27 nations, of which fifteen are in the Euro zone. There's a common currency and a constrained central bank, but can this gaggle of geese possibly agree on concerted action in this crisis? America was once in this situation under the Articles of Confederation, but even after almost losing the Revolutionary War, George Washington was nearly unable to get the colonies to form a union. Even after this experience, the Southern Confederate States later adopted the same system of a central currency without a central government and really did lose their war.

Are we to infer from Prime Minister Brown's attitude toward banks that he might soon suggest ditching little nations in order to save bigger ones?

www.Philadelphia-Reflections.com/blog/1525.htm

http://www.philadelphia-reflections.com/blog/1525.htm


National Debt, Presidential Hat Tricks, Shale Gas and Argentina

{Alexander Hamilton}
Alexander Hamilton

This-here speaker at the Right Angle Club began a discussion of the "Fiscal Cliff" razzle-dazzle of 2012, by changing his mind about the causes of the fiscal crash of 2007. Originally, it seemed as though globalizing 500 million Chinese out of poverty had destabilized the exuberant American mortgage market by flooding it with cheap credit. Supplanting that idea, or perhaps only supplementing it, must now be added the overextension of national debt itself to a point of bringing national borrowing to a halt.

Early in the Eighteenth century the Dutch and English had monetized national assets through a system of national borrowing formalized by Necker in Europe, and Robert Morris and Alexander Hamilton in America. Aside from a handful, no one could understand what they were talking about. Try reading that sentence a second time.

It amounted to guaranteeing all the private credit in the banking, investment, and commerce systems, with a national debt (in the form of Treasury bonds) which monetized all the assets of the whole nation. That action more or less doubled their value, just as any bank loan is seemingly owned by two people at the same time. Carried to an extreme, it might imply that America could turn Guam and Hawaii over to China if we defaulted on our debt. That was never actually intended to happen, and it never has, because all nations now fear the deflation which could result from triggering a massive exchange of national assets. The nebulous issue of "National Sovereignty" interferes with territorial transfers by any means other than war. If one nation defaults against a second nation which is afraid to go to war, it is just the stronger nation's hard luck about the debts it has chosen to support, unless a transfer of assets actually happens. The Treaty of Versailles did transfer assets to the victors, and set off World War II, although it is considered bad manners to mention it. That's a simplified view of our international financial system, which admittedly skirts uncertainty about how much national debt is too much.

In fact, no one knows how much is too much until everyone runs for the exits. Now that politicians have control of computers and "big data", a modern description places the blame on Alan Greenspan the former Chairman of the Federal Reserve. For eighteen years Greenspan produced delicious world prosperity by steadily increasing American national debt faster than the American economy was growing. Sooner or later this approach was going to uncover how much was currently too much Federal debt. With silver and gold removed from the equation, one could see that default would certainly loom whenever the size of the debt became so large it could never be serviced by the Gross Domestic Product (GDP), and possibly sooner than that if enough people could guess what was coming. This reality might be obscured temporarily by reducing interest rates, modifying international trade balances, and inflation. When the stars were in alignment however, the system just had to collapse and start over. Because it happened gradually, perhaps it would unwind gradually. In 2007 what happened was that everybody tried to get out the door at the same time. Essentially, our two political parties made opposite assessments: the party of Hamilton -- Republicans -- announced this system was doomed, while Democrats --the party of Andrew Jackson -- announced they could stave off disaster by making the rich Republicans pay for it. Both parties were partly right but essentially wrong, and the Democrats hired a better magician.

{Henry Clay}
Henry Clay

It will take months or even years to be certain just what strategy was pursued. It would appear the Democrats chose to repeat the performance of the Obamacare legislation, eliminating national debate by eliminating the Congressional committee system of examining details in advance of a vote. Given one day to digest two thousand pages prepared by the Executive branch, no time was allowed for public opinion to form about Obamacare. In the case of the fiscal cliff episode, Congress was given less than one day to consider 150 pages allegedly prepared the day prior to the vote. Some will admire the skill of the executive branch in orchestrating this secret maneuver, but eventually it must become apparent that policy decisions have been transferred from the legislative to the executive branch of government. Perhaps the Congressional Republicans are as stupid as the Democrats portray them to be, but it is also possible that a decision has been made to tempt the Democratic leaders into repeating this performance several times, until eventually the public is ready to consider impeachment for it. No matter what the strategy, we are now threatened with imagining some moment when gun barrels come level, and live rounds slide home. We may pass up the opportunity to criticize Henry Clay for concentrating undue power in the Speaker of the House, or to uncover the way Harry Reid was persuaded to surrender Senate power to the Executive; both miscalculations are fast becoming irrelevant in the flurry of events. We came close to borrowing too much, exceeding our means to pay it back, that's all. A New York Times editorial economist feels we can "grow" our way out of this flirtation with danger, and we all certainly hope so.

Seemingly, there are only two ways to cope with over-borrowing, once we step over the invisible line. A nation may cheat its citizens with inflation, or it may cheat foreign citizens by defaulting on their currency. We are indebted to Rogoff and Reinhart for pointing out there is no difference between inflation and default except the identity of the cheated creditor; so most politicians prefer to cheat foreigners. Either way, cheating makes deadly enemies. Two centuries ago, Alexander Hamilton suggested a third way out of the problem, which we would today call "growth". But here, cheating is pretty easy: If the limit is some ratio of debt to GDP, find a way to increase nominal GDP.

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Shale Gas and Argentina

The most astonishing current example of the power of "growth", is shale gas. It may not be totally clean, but it is cleaner than oil or coal, and far cheaper. We suddenly have so much of it the price of energy is artificially lowered, and we talk, not merely of energy independence, but of restoring the balance of international payments by exporting it. Germany is constructing steel mills to utilize iron ingots made in America with gas instead of coal. Pittsburgh was once the center of steel production because that's where the coal was, the most expensive ingredient to transport. Suddenly it is now apparently cheaper to transport the energy source to wherever you find limestone and iron ore. JP Morgan got rich the other way, transporting limestone and iron ore to Pittsburgh, where the coal was. Russia now finds it has lost its leverage over Eastern Europe's energy supply, and the Arabs (?Iranians?) will no longer have a monopoly to provide the wealth supporting Middle-Eastern mischief. China may lose interest in Africa. And in America we may develop the courage to rid ourselves of the corn subsidies for gasoline; cutting the wind and sunlight fumbles also emerge as obvious ways to cut the deficit. That's what we mean by growth. It's so powerful it makes action by any American President seem trivial by comparison.

Presumably, President Obama does not welcome being upstaged by an economic force he doggedly resisted. He may seek ways to imply it was his idea all along. When that happens, rest assured that everyone else is then a fracker. But there is another alternative Presidential path, which in extreme form is emerging in Argentina without much media attention. In short, Argentina discovered signs of oil deposits but was unable to exploit them. A European oil company was enticed to develop the oil reserves at its own expense, and effectively did so in expectation of reward from the resulting oil sales. Suddenly, the Kirchner government expropriated the oil company, paying for it with Argentine bonds. The ink was scarcely dry before the Argentine government abruptly turned around and offered to buy back the bonds for 24 cents on the dollar. And unless someone is willing to send gunboats, the previous owners of the oil company are just out of luck. Appeals to the UN are futile; because on the one-nation, one-vote principle, there are more expropriator votes in the UN than potential victims. The only thing visible which could save capitalism in South America from revolution, is shale gas competition. Presumably, Argentina has lots of shale gas, but who will lend them the money to frack it?

http://www.philadelphia-reflections.com/blog/2403.htm


Mexican Immigration and NAFTA

{George H.W. Bush}
George H.W. Bush

The North American Free Trade Agreement (NAFTA) was signed on December 17, 1992 by President George H. W. Bush for the United States, Prime Minister Brian Mulroney for Canada, and President Carlos Salinas for Mexico. It was intended to eliminate tariffs from the North American continent, with long run benefits for the three nations who made the agreement. Essentially, it was President Bush's idea, growing out of the long period of public service in which he prepared himself for the Presidency in most of the major components of the American government. After his election, he immediately started to implement the many ideas he had formulated, characteristically worked out in considerable detail, and assigned to government officials he had worked with and knew he could trust. The twin results were that he advanced sophisticated ideas much more quickly than is customary, but then experienced backlash from a public which was accustomed to understanding programs before they assented to them. NAFTA was a prime example of both the advantages and disadvantages of an expedited approach.

Tariffs are a tangled ancient political dispute between nations; George Bush got his two neighbors to sweep them away in a remarkably short time for diplomacy. However, plenty of people benefit from the pork barrel, the unfairness and the economic drag of tariffs, so Bush even got ahead of that opposition, essentially presenting it with a done deal. However, he failed to be re-elected because his fellow Texan Ross Perot campaigned as a third party candidate, thundering about a "giant sucking sound" which was predicted as American businesses would flood into Mexico. Whatever Bill Clinton may think, he won the election as a result of the third-party divisiveness of Ross Perot. And Clinton furthermore got to take credit for NAFTA largely because he claimed credit. Poppy Bush followed Reagan's strategy of winning by letting others take the credit.

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NAFTA

NAFTA had a lot of minor provisions, but the main feature was to help Mexico with manufactures, compensating for America hurting Mexican agriculture with cheaper United States agricultural imports. The usual suspects howled about the unfairness of such a dastardly deed, but they lost. Helping Mexican manufactures took the tangible form of the "maquiladoras", which were assembly plants from the United States re-located just south of the border, assembling parts made abroad into machinery and other final products, for sale in the United States. The general idea behind this was that Mexican immigration was mostly driven by hunger for better jobs; give them jobs in Mexico, and they would stay home. That's a whole lot better than an endless border war. Even today, it would be hard to find anyone who would contend that fences, searchlights and police dogs were a superior way to control the borders.

For a while, the maquiladoras were a huge success. But then, China got into the act, paying wages so low that even Mexicans could not live on them. No doubt Ross Perot rejoices that the maquiladoras promptly collapsed, leaving abandoned hulks of factories just across the dried-up Rio Grande. And eventually, we even have tunnels bored under the border, and more illegal Mexicans in America than we have people in prison who might take the same jobs. Not the least of the consequences came from the other parts of the same country. Mexico traded an injured agricultural economy for the promise of high-paid manufacturing jobs in maquiladoras. So, masses of impoverished Mexican farmers were made available for illegal immigration, up North.

It is now anybody's guess whether Chinese wages will rise enough, soon enough, to reverse the economics of their destruction of the Mexican economy. The election of a union-dominated Clinton/Obama presidency in the meantime does not bode well for actions which would reverse that result, which now would threaten American-Chinese relations of an entirely different sort. It is true that Chinese wages are relentlessly rising, and that transportation costs now favor assembly-factories closer to the American consumer. But maybe the moment for this approach is passing, or possibly has passed.


REFERENCES


George H. W. Bush: The American Presidents Series: The 41st President, 1989-1993: Timothy Naftali, ISBN-10: 0805069666 Amazon

http://www.philadelphia-reflections.com/blog/2413.htm


Cyprus Tests the Limits of Paper Money

{Cyprus Map}
Cyprus Map

Tourists like to banter about their favorite place in the whole world; until recently, mine was Cyprus. It's an eastern Mediterranean island, where it was possible to swim from beaches in the morning, ski in the afternoon, and luxuriate in an inexpensive but posh hotel in the evening. The locals had their ethnic rivalries, but what would a tourist care. Since I was last there, apparently Russian and other billionaires discovered the place, and now three local banks are bigger than the GNP of the nation. Like Ireland, Hungary, Iceland and several other small European nations, this dystrophic growth made it impossible for the government to guarantee the assets of the banks, as the familiar "lender of last resort" because the banks were bigger than the government. Accordingly, the local government was forced to declare a protracted bank holiday, to forestall what was certainly going to turn into a run on the banks as depositors all tried to get out the door at the same time. International stock markets immediately dropped a noticeable number of points, as the whole world suddenly discovered Cyprus wasn't such a nice place to put your money after all. The Russians might possibly be nasty people, but in this matter of bank deposits, people all link arms internationally like brothers.

There have been lots of other bank panics in small nations without much agitation, so what seems to have bothered the markets was the decision of the Central European Bank to tax the depositors 10% to support the system. Christine Lagarde, the head of the International Monetary Fund, said she thought it was a good idea to tax depositors, and that really upset a lot more people. Ms. Lagarde is French, but the IMF which she heads is located a few blocks from the U.S. White House, so the suspicion grew that Mr. Obama might approve of placing a tax on bank deposits, too. As things started to get out of hand, everyone hastily dropped the whole idea, and even the Cypriote Parliament voted against it. There was no time for even the large organizations devoted to managing the news to manage this one. World opinion was instantaneously mobilized, and thunderous in voicing its low opinion of taxing bank deposits, by anyone, anywhere. What was accidentlally aroused was the realization that since the World went off the gold standard in 1971, the world's money is backed by nothing at all except a computer notation. Irrevocably taxing it in bank accounts could be done in an hour.

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Pelican

In 1944 the international conference held at Bretton Woods, New Hampshire, agreed that other nations could exchange their currency for American dollars, but only the U.S. dollar could be converted into gold. As long as the U.S. ran a trade surplus, the gold remained undisturbed in Fort Knox. But when other nations began to export their goods in the 1960's, their dollars began to be changed into gold. Gresham's Law took over quickly, since when two currencies of unequal value circulate together, the more valuable one will quickly disappear; the shifting balance of trade had made gold more valuable than dollar bills. When President Nixon began to see that Fort Knox was soon going to be emptied, he put a stop to the exchange. He "closed the gold window". At that point, we were all off the gold standard, but nothing much happened. It remained possible to continue to speak of gold as a "barbarous relic", and by implication any standard like silver or oil or land, was also a barbarous relic. But the experience of Cyprus taught the world that everyone did want the value of currency to be independent of the whims of government, and like the Emperor's suit of clothes, was just waiting for someone to point it out. A system of monetary exchanges, or exchanges of goods and services, really can be run without backing by anything except the word of government. But inflation targeting does need a government to run it, and thus governments have acquired a power over currencies which centuries of experience had taught people not to trust for a moment. North and South American hemispheric trade had been comfortably run without governments for centuries, as long as there were Spanish pieces of eight in actual circulation. But the modern Cyprus government could not run for a week without the trust of depositors, and neither can any other government. Conversely, it is impossible to run an economy without a government to guarantee the international value of money. People don't like that situation, and the threat of chaos in the streets is not much different in any place in the world which does not run a brutal military system. When you reach a point where even the soldiers refuse to be paid with paper money, you are about at the point General George Washington found himself after the Revolution. Robert Morris convinced him it would be possible to base a currency on the credit of the nation, and General Alexander Hamilton had been taught how to run such a thing. The rest of the country didn't understand what that meant, but they did understand that it seemed to work. But it would only work if the people trusted their Constitution, and the government it designed. But then, our government never tried to put a tax on bank deposits. In fact, it took another hundred years before the American public was completely certain you could trust banks even to exist. The good ol' mattress, that's where to keep your money. If it's in gold coins, that is. Paper money might just as well be in a bank, because its value is only symbolic of a government promise.


REFERENCES


The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order: Benn Steil: ISBN-13: 978-0691149097 Amazon
Robert Morris: Financier of the American Revolution: Charles Rappleye: ISBN-10: 1416570926 Amazon
Bitter Lemons: Lawrence Durrell: ISBN-13: 978-1604190045 Amazon

http://www.philadelphia-reflections.com/blog/2435.htm


Stress Tests for the European Union

{Dr. Ronald J. Granieri}
Dr. Ronald J. Granieri

Dr. Ronald J. Granieri of the office of Secretary of Defense, recently spoke to the Right Angle Club about recent threats to the unification of Western Europe. One of his more striking points was that the 1989 collapse of the Soviet Union ending the Cold War, may have unintentionally thwarted the plans for a European Union. The Iron Curtain running from the Baltic to the Black Sea had served as an Eastern boundary for European dreams. When the curtain suddenly disappeared, the European Union was flooded with applications for membership from the recently liberated, formerly Communist dominated, Eastern bloc. It was understandable why these countries would wish to get away from Russia, and equally understandable that Russia would be annoyed. But bedazzling expansion was quite unexpected by the European Founding Fathers, who were having enough trouble without doubling their number with weak economies. If Napoleon or Bismarck or some other empire-builder had been in charge at that time, Europe would either have been expanded by brute force, or its borders slammed shut with brute force. But in the clutch no one was thinking big. Acquiring twenty new nations was an undreamed-for opportunity, but a technical headache for academic theorists. It called for bold action at a time when bold actors were not in charge.

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13 Colonies

Although it hurts European pride to admit they were following the American model, most of the problems they were encountering were the same problems our own Founding Fathers encountered in 1789. There were two main differences, however, one of which had been written into our Constitution. The other went largely unnoticed. The written difference was we had a bicameral legislative branch, designed to address the issue of voting rights straddling three big states and nine little ones. Pennsylvania had already gone through a dispute over the unicameral Pennsylvania Legislature, which proved to have so much power it unbalanced the three-branch system of government. Consequently the Philadelphia Constitutional Convention, held in that same building, was already uneasy about unicameral legislatures. It was John Dickinson the delegate from little Delaware, who went to James Madison (of Virginia, then the largest state) and told him bluntly that if Virginia persisted in demanding a unicameral Congress with representatives elected by population size, well, there just wasn't going to be any Union. The three big states refused to participate in any one-state, one-vote, system, while the nine small states wouldn't submit to large-state domination by population size. Either voting by state or voting by population would inevitably result in one side winning every hotly contested vote in a unicameral legislature. So, we had solved our problem by having two legislative houses, one of each kind, and agreeing that legislation would only proceed if both houses were in agreement. What made any legislation possible under these terms, was the informal system of "log rolling", in which informal agreements on seemingly unrelated matters would compensate the loser branch of government, and the states they represented. Since in modern Europe, any group of ten or twenty states in a union would surely have memberships of unequal size, bicameral legislatures seem to Americans to be a perfectly sensible arrangement, so get on with it. The insistence by the League of Nations and the United Nations for one-vote, one-nation arrangements, is a major reason the United States never permitted these supranational forums to have much power.

{Iron Curtain}
Iron Curtain

It's an unspoken truth however, that other nations do not see it our way. That's partly because the German and other parliaments going all the way back to the Roman Senate had established a unicameral tradition in Europe. The other main but unwritten cause of Constitutional differences between the two continents is that we had been surrounded by thousands of miles of ocean, and never had to consider the danger that external and internal enemies would join forces to frustrate our decisions. It is true that many attempts were made to do just this, but they were immediately recognized and easily quashed in the past. As long as the Iron Curtain was operational, Europe thought it might have such ocean-like protection as well, but events in 1989 swept that idea away. With a large addition of formerly hostile states, some members were occasionally bound to join forces with Russia or China, even though they were nominally loyal citizens of the EU. Traitorous behavior had long been an underlying cause of splinter parties and brutal suppression, but that was when Communists were thought by everyone to be agents of a hostile foreign power. With the end of the Cold War they might become misguided local citizens exercising freedom of speech, claiming a right to argue for behavior which would have formerly been denounced as traitorous. Nations harboring few such inclinations soon became cautious about joining government with nations who had a great many of them. Citizens of recently enslaved nations were particularly resistant to soothing arguments about unity. It must be confessed that the example of our own Civil War lends force to this feeling of what might happen.

{Baltic and Black Seas}
Baltic and Black Seas

It may be claiming too much to describe the fall of the Iron Curtain, as the major reason for decline of interest in forming a political union in Europe. That decline did occur, and was replaced by the rather weak stratagem of leaving unified government to another time. In its place appeared a strategy of economic unification, hoping the benefits to everyone would become so apparent that unified nationhood would follow. A substrategy emerged, narrowing it to a unified currency, the Euro. Bankers and other financial experts argued that such unification would be fairly simple and effective. And so it proved, until the same difficulty appeared in a different form. The design of the Euro Currency Zone had apparently underestimated the problems of a foreign currency operating together with the Euro, and variants of Gresham's Law surfaced. Small nation members like Iceland and Cyprus found their small banking systems could not cope with huge inflows of flight money, escaping to tax havens within the Euro zone. As well, underdeveloped member nations actually romanced non-member capital to relocate to their shores. Since local currency is ultimately supported by the full faith and credit of the nation, local banks and economies cannot easily deny equal protections to foreign capital, except temporarily while exchange controls are applied. But when a sufficiently small nation is thus forced to guarantee a sufficiently large amount of foreign money, local banks and markets will be destined to crash. If, in addition, the member nations are deprived of the ability to devalue their currency as the Euro zone could, some type of informal arrangement for a two-value currency had to be devised unless more prosperous members like Germany were willing to subsidize the money flows. When two currencies of unequal value circulate together, said John Gresham to Queen Elizabeth I, the more valuable one will quickly disappear.

http://www.philadelphia-reflections.com/blog/2443.htm


Appealing the Constitution to a Higher Authority

{Privateers}
Justice Robert H. Jackson

According to Justice Robert H. Jackson, "We" (The Supreme Court) "are not not final because we are infallible, we are infallible because we are final." Scoop Jackson was the last Justice who never went to college or graduated from Law School, so his viewpoint concentrated on the practical outcome of a situation. In fact, the father of our constitution, James Madison, was learned in the history of many constitutions, and was well aware of allusions to divinity in the construction of our governing document, particularly when the sources of strong beliefs couldn't be grounded in evidence. The Constitution is an attempt to reconcile our culture to the needs of governance and the revelations of controversy. Composed by Enlightenment rationalists within a highly religious environment, the Founding Fathers were careful to use the metaphors of Religion, even though many were personally skeptics about the substance. Indeed, the Penman of the Constitution who ultimately wrote most of the words was Gouverneur Morris, a flagrant libertine. It had been the tradition of Constitutions to describe their culture by allusion to epic poems, drawing inferences about Right and Wrong from what had subsequently happened to ancient heroes after similar situations unfolded. Some would put the plays of Shakspere in that role in 1787, but the evidence is stronger for Roman writers, like Cato and Cicero. In my own view, this leap of faith was only divine in the sense it was a one-way street. A citizen might try to emulate the ancients, but appealing back to them was not likely to work.

http://www.philadelphia-reflections.com/images/missing_img.gif
Constitution

Although the Constitution can be viewed as bridging a gap between Culture and Common Law, or perhaps as placing a guardhouse between them, this relationship is not spelled out and therefore in theory might be changed. Other cultures, perhaps the native Indian, or the Catholic Church of Central Europe, might be substituted, or other legal structures resembling the Napoleonic Code might serve on the opposite side of the bridge. These substitutions were a legal possibility, but there is little doubt the American leadership intended for an Anglo-Saxon culture, linked with Francis Bacon's legal system, to prevail under a distinctively American flag. Because of our debt to France for then-recent assistance, there was once the possibility of French coloration to our culture, but the excesses of the French Revolution soon ruled that out. Some modern observers have capsulized the scene: First, we got the British to help throw out the French in 1754; and then in 1776 we got the French to help us throw the British out. Both our allies thought we played their game, but we were playing our own. The new Constitution specified no laws, but with little doubt the Framers intended the states to adopt British Common Law without the infelicity of saying so.

{Privateers}
Bill of Rights

And then there is the Bill of Rights. Madison had great faith in the ability of structure (separation of powers, term limits, etc.) to command predictable outcomes, and initially resisted any need for a Bill of Rights. But the Ratification Conventions in the states showed him the need to yield. The First Congress soon enough confronted over a hundred proposed rights in petitions from the states, especially the four big ones. If anyone else had been in Madison's position, our Bill of Rights would resemble the European one today, fifty pages long and growing. That outcome would have greatly weakened the Legislative branch, since after protests about Mother Nature subside, the legal fact emerges that Rights are merely laws which no majority can overturn. They might even be characterized as a contrivance for transient majorities to promote the permanence of their viewpoint.

{Privateers}
The Founding Fathers

But they are not the only contrivance in politics. Enshrinement of the Founding Fathers elevated their political positions into near divinity, whereas debunking the Founders personally undermines their symbolism as statues and myths. There was too much of this during the romance period of the Nineteenth century, but also in von Ranke's later marginalization of History into mere scholarship and footnotes, which was a reaction to it. The Founding Fathers themselves now supplant Achilles and Cincinnatus in our lexicon, and we have little choice but to accord more weight to their original intent in the Constitution, than to contemporary reasonings. Indeed, we are forced to acknowledge more similarity between George Washington's fictitious cherry tree than to his relations with Peggy Fairfax, when we interpret his thundering "Honesty is the best policy" in the second inaugural address. It is admittedly a difficult choice, but Justices now need to consider what his audience widely believed was his original intent, more than what later archeological discoveries uncover. Justice Scalia is correct in placing more weight on the original intent of the Founding Fathers than contemporary reactions to the same words. But in occasional conflicts between myth and reality, it seems safer to consider what the audience then widely believed, than what modern audiences would guess at.

http://www.philadelphia-reflections.com/blog/3075.htm



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